Should you switch equity release? by Finance News Bulletin

Published: 22/05/07

Elderly borrowers who signed up to fixed-rate evenhandedness release deals in the late 1990s or near the beginning 2000s could save their brood - or the other beneficiaries of their wills - tens of thousands of pounds by switching to cheaper loanslife mortgages, where older borrowers lift loans against their home and repay the capital, with interest, on bereavement, took off in the late 1990s They stay the most popular way to release evenhandedness from property and 25,000 new deals are entered into each yearInterest rates are usually set to protect borrowers against spiralling debt

But in the history decade, rates on novel deals have fallen and competition has increased as novelcomers such as Saga, Prudential and normal Life have moved into a marketplace previously dominated by just Northern Rock and Norwich Uniontax in 1999 and 2000 averaged eight to nine%, but a good deal nowadays charges 65% Because the interest is rolled up for the life of the mortgage, it grows alarmingly rapidly, compounded in a steeply climbing curve

The difference in the price of two rates over time is illustrated dramatically on the chart, right, based on a £50,000 initial equity let goOver 30 years - and there is a reasonable statistical chance of a pair in their sixties surviving for that time - the dissimilarity between the total cost of a £50,000 loan emotional at 65% or 85% works out at a quarter of am pounds

Borrowers have some defense, however, as loans cannot exceed the value of the property This is one of the circumstances laid down by Safe Home Income Plans, an organisation that aims to raise public self-assurance in equity releaseBefore homeowners switch, they must tax three factors, warns expert Peter Fisher of Help the Aged evenhandedness Release Service, a fee-charging advice arm of the charity'First, seem at penalties applying to the obtainable loan,' Fisher says, though he points out that many deals have penalties that disappear after five years

'The other factors are the upfront expenses involved in switching to a improved rate Lastly, you need to see how long it would take to be better off'Most lifetime mortgage lenders charge penalties for switching as a proportion of the loan outstanding, say five% of the loan for the first five years But in a few cases, as with lenders Norwich Union, Prudential and Stonehaven, penalties are open-ended because they depend on actions in interest rates or government borrowing - gilts

Homeowners with these lenders will not know what punishment, if any, applies until they inquire for a redemption figure on their loan But Norwich Union, for instance, says that loans taken out in 2000 are currently penalty-freeBorrowers who button must clear the original loan, advantage interest accrued So, for instance, a £30,000 lifetime mortgage taken out in 1998 at an interest rate of 8

5% would now have full-grown to £62,516CHANGING RATES: Those who took out equity let go deals more than five years ago may advantage from a switchPotential savings at the new, lower speed depend on how long the borrowers remain in their house before they sell up - or dieHis view is echoed by Dean Mirfin of Key departure Solutions, the main equity release adviser service, who says: 'Interest rates have fallen considerably over the past five years or so'For many, their loan may last 20 years plus, so they should be aware of opportunities to put aside

'This is Money is packed with news, recommendation and tools that can help you get ahead and save moneyFlexibility was significant to Pat and Tony Maynard as they looked into releasing equity from their homeIn the history, the couple, from Littleborough, Greater Manchester, had taken out loans to uphold their semidetached property, but the repayments were very cold into their income They worked for much of their lives in their own bakery business

tap is now retired while Tony is a part-time inn chefAfter much reflection and discussion with their children, they took out a lifetime mortgage, releasing just under a third of the value of their home in February This empty their debts, release up hundreds of pounds of monthly incomeThe lifetime mortgage, from Bradford & Bingley offshoot Mortgage Express, is charged at 6

3%, fixed for lifeThe mortgage can be redeemed if tap, 63, and Tony, 65, sell to go into a care home and can also be transferred to another property if they swap their home for somewhere smaller If one of their brood wants to live in the home, they can take on the mortgage and convert it to a straight refund deal'Our children all have their own homes,' says Pat

'They told us to go for it We spent hours with the financial adviser He told us to take our time'The Maynards used an consultant from Key Retirement Solutions, a firm whose advisers advocate deals from any lender

A growing number of independent advisers specialise in equity let go'Most of our friends are our sort of age,' says tap 'And I'd recommend equity release to them, if that's what hysterics I know precisely what it costs and I'm totally confident with our scheme

'Both life mortgages and the other form of equity release, called reversion, are regulated by the Financial Services Authoritylife mortgage lenders must mark to the borrower at the outset, spelling out the belongings of interest on the total repayable over a range of scenarios And by law, they must propel annual statements alerting borrowers to their growing debt• For a gratis copy of Home Truths --Financial Mail's Guide To Unlocking The Wealth In Your Home, call 0800 085 5755

• Safe Home Income Plans, a voluntary organisation that guarantees principles in equity release, can be contacted on 0870 241 6060 To find an independent adviser specialising in equity let go, go to unbiasedcouk - the website of IFA endorsement - or search the the Personal Finance Society's place at thepfs

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