Lifetime mortgages are the most popular form of equity release in 2020, and they work very similarly to residential mortgages. But there are some differences. When speaking with clients, I am often asked, "is equity release interest fixed?".
All lifetime mortgages meeting the Equity Release Council standards must have fixed interest rates or, if they are variable, there must be a "cap" (upper limit) which is fixed for the life of the loan. Fixed equity release interest rates are set at the outset and do not need to be renewed; they are fixed for life, regardless of how long the mortgage runs.
We now know that fixed interest rates will be set at the time of borrowing and will remain the same from the start of the plan until the plan ends. But you may be asking if it is more expensive to have a fixed or variable rate equity release? Let's explore this question, and others, in greater detail.
In this guide, you will learn:
Fixed-for-life equity release interest rates are most likely cheaper than an equivalent variable-rate plan. 2020 has seen the lowest fixed-for-life equity release interest rates ever. Currently, fixed interest rates are from 2.27% (AER), whereas variable interest rate plans start at 3.61% (AER).
There are a few exceptions where a variable interest rate plan will be cheaper. Having understood your circumstances, your equity release advisor should explain the most cost-effective plan for you.
Currently, there is only one lender, OneFamily who offer variable rate equity release plans. Let's look at how each type of interest rates differ.
Fixed-rate Equity Release:
The fixed rates for equity release will vary depending on your property value, your age, and the LTV (the amount you borrow relative to your property value). The more you borrow, relative to the maximum available to you, the higher you can expect your interest rate will be. It will, however, remain the same through the life of the mortgage.
Currently, fixed-for-life equity release interest rates range from 2.27% to 6.47% (AER).
Variable-rate Equity Release:
The initial interest rate may be lower with a variable rate equity release than a fixed-rate plan. But, your interest rate will be reviewed and subject to changes and increases over time.
OneFamily is currently offering a two year fixed lifetime mortgage with interest rates from 3.61% to 4.49% (AER) depending on the amount you borrow.
After the initial fixed period, interest rates are set at a percentage above the Consumer Price Interest (CPI is the official measure of inflation). The interest rate is updated annually on 1st December, based on the CPI for September.
If the CPI is below zero, the collar (lowest) rate of the product will apply.
The interest rate will also be capped, meaning that there will be an agreed maximum interest rate that it will not go above during the life of the plan. The interest rate cap is currently 7.98% (AER) on this plan.
When your fixed rate is agreed at the start of your equity release plan, it will remain the same for the whole life of the equity release plan. There is no 2, 3, or 5 year fixed rate like with residential mortgages that you need to fix again.
Over recent years, we have seen significant reductions in equity release interest rates, and it could save you thousands of pounds to switch to a lower interest rate plan. I have written a full guide on changing your equity release plan to save money.
Alternatively, if you have a variable rate equity release, you will likely have the new interest rate set for you. OneFamily says "The interest rate is updated annually on 1st December, based on the CPI for September" for their current variable rate plans.
Let's look at the CPI each September for the last 5 years (source: https://www.ons.gov.uk/).
If you already have a variable rate lifetime mortgage, you should be benefitting by the reduction in the CPI this year. However, as fixed-for-life interest rates have dropped, you should still consider switching to a fixed-rate plan.
An important consideration when thinking about drawdown equity release plans (when you can draw upon a pre-agreed reserve as and when you need), is the differences in interest rate.
While the interest rate is set at the outset of the borrowing, each subsequent drawdown will have its own interest rate.
All equity release lenders set the drawdown interest rate to the prevailing interest rate at the time of the drawdown. This means that when borrowing more money, the interest rate could be higher, or lower than the initial sum released.
For this reason, it may be more cost-effective to switch to another equity release plan, rather than to borrow more with your existing lender.
If you are considering making a drawdown, we are happy to guide you through the most cost-effective option for you. Contact us to discuss your drawdown options.
The interest on your equity release plan does not need to be paid monthly as a traditional mortgage, but will 'roll-up' and be added to the initial loan borrowed. This will be fully illustrated in your equity release Key Facts Illustration (KFI) and subsequent offer.
The illustration will allow you to see the amount of interest you will be charged annually, how it builds up, and what you will owe over time. A standard illustration period is 17 years. This does not mean that the plan will end then, but it allows you to see how much you will owe over a specific period.
You will need to be aware that the interest charged on your equity release plan is added, and then interested charged on the new total. This is known as compound interest.
If you are taking equity release as you do not wish to make regular monthly payments like a standard mortgage, then there are options for you as well.
Some equity release plans come with the option to make voluntary payments. This is usually up to 10% per year without incurring any early repayment charges.
Another option you may wish to consider if you have income available and would like to prevent the interest building up is an interest serviced plan.
With an interest-serviced plan, you will be able to release a lump sum as with other plans. The difference is that you have the opportunity to pay the interest monthly, either partly or wholly. This helps keep the amount you owe at the end of the plan as near as possible to the original capital sum borrowed.
With an interest-serviced plan you may stop making monthly payments at any time that you don't wish to continue them. If you have received a reduction in the interest rate due to making monthly payments, your interest rate may increase. Details of any reductions in rates will be clearly shown in your mortgage offer.
Once you decide that you wish to stop payments, you will be unable to restart them by direct debit. The plan will then switch to a 'roll-up' plan until the end of its life. You may, however, still be able to make voluntary payments without charge, subject to the terms of your specific lifetime mortgage.
When you look at how the amount you owe goes up, it is also worth remembering that property prices can go up or down. And this can affect the amount left over for you or to your estate after the mortgage is repaid.
Example based on a property value of £185,000:
If your home went up in value by 1% each year, it would be worth £219,096.32 after 17 years.
If your home went down in value by 1% each year, it would be worth £155,944.49 after 17 years.
This is an example only and is not how much the value of your home will change.
An area of concern you may have is that if the value of your property goes down, how will your beneficiaries repay the balance owed?
With all plans that meet the Equity Release Council standards, neither you nor your beneficiaries will owe more than your properties worth. You are protected by the 'no negative equity' guarantee.
Upon your death or (if a joint plan) on the death of the second borrower, or if you need to move into long term care, if the value of your home is not enough to repay what you owe on your lifetime mortgage, the lender will be responsible for absorbing the difference.
Retirement interest-only (RIO) mortgages are aimed at people aged 50+ and who are looking to release some equity from their home. RIO mortgages are income assessed, and you will be required to prove that you are able to make the monthly interest payments.
With a RIO mortgage, you will be committed to making the monthly interest payments until you pass away or go into long term care. At that time, the mortgage will need repaying to the lender, typically from the sale of your property.
As at July 2020, the average rate (fixed and variable) for a RIO mortgage is 3.29%, and the average rate (fixed and variable) for an equity release plan is 4.27%.
However, RIO interest rates are not fixed-for-life like lifetime mortgages are. Therefore, while the headline rate may be lower, it can also go up in the future and may cost more over the long-term.
There are different advantages for both RIO mortgages and equity release plans. Our advisers will be able to help you find the right option for your circumstances.
If you have further questions, why not speak with one of our qualified advisors?
Call us on 0207 158 0881 or use our online form to book your FREE consultation.
While a qualified equity release advisor has written this guide, it is not intended to be used as financial nor legal advice and should not be relied upon.
To understand the full features and risks of an Equity Release plan, ask for a personalised illustration.
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