Equity release borrowers could save thousands of pounds by paying down interest monthly

Equity release customers could be losing thousands of pounds from their house price by paying rolled-up interest rather than monthly payments.

Equity release allows homeowners aged 55 or over to access some of the money tied up in their property tax free.

Borrowers get a loan secured on their home – usually up to 49 per cent of its value – and they remain the sole owner. It is paid back with interest from their estate after they die or go into long-term care – although on some plans there is the option to pay some of the money back earlier. 

Three quarters of equity release (also known as later life mortgage) customers choose to roll up the interest on their loan and pay the whole thing off after they die or go into care, according to later life mortgage broker Responsible Life.

While this is the right choice for many, it does mean customers turn their backs on the overall savings that can come with paying down interest regularly. 

Monthly payments to reduce interest owed on the loan can result in big overall savings at the end of your loan as customers retain more equity in the property.

Research from Responsible Life found that if borrowers choose to pay off interest each month it can have a huge impact on the amount of equity left in the property.

We have taken an example £400,000 property with no mortgage, a lump sum lifetime mortgage of £82,000, an average interest rate of 6.65 per cent and an average loan term of 16 years.

If a customer lets the monthly interest of £454 roll up over the term of the loan, they would have £163,066 of equity left in the property if it was sold after 16 years.

By choosing to make small interest repayments of £100 per month for five years – less than a quarter of the monthly rolled-up interest – the equity left would be £177,781. That’s almost £15,000 additional equity that could be passed on as inheritance or used elsewhere.

Making repayments of £100 per month for the entire loan term, the equity left on sale of the property would be £197,161, or £34,000 more than if no interest was repaid.

However, they would need to make sure they could comfortably afford the £100 per month payments on top of their other living expenses in retirement.  

Rolled-up interest is the most popular way for borrowers to pay off the amount but they could be wasting thousands of pounds

Steve Wilkie, executive chairman of Responsible Life, said: ‘One of the historic concerns amongst homeowners when it comes to taking out an equity release plan is the amount of rolled-up interest paid when the home is sold.

‘Lifetime mortgage products now offer customers the flexibility to pay off some or all of the rolled-up interest every month to leave more equity in the property, and yet three-quarters of equity release customers still choose not to repay any interest.

‘It’s important customers not only understand the costs associated with a lifetime mortgage but how to manage those costs.

‘Equity release has been criticised as expensive compared to other mortgage types, particularly the Retirement Interest Only Mortgage aimed at a similar age group. The criticism was aimed at the costs of letting the interest roll up, but is now outdated.

‘With the flexible repayment features now available in all Equity Release Council-approved plans, customers now have control over the costs in a similar way to other mortgage types.’

Older homeowners borrowed £6.2billion against the value of their properties through equity release last year, up 29 per cent from 2021.

On average customers released £106,806 from their home last year, using the money for a variety of reasons, such as home improvements, helping fund retirement and giving early inheritances.

In March 2022, regulation was introduced for all new All ERC-approved equity release plans guaranteeing customers the right to make voluntary, penalty-free partial repayments to reduce interest costs.

ERC-approved plans also guarantee borrowers the right to remain in their property for life, and have a no negative equity guarantee.

That means if the amount left after the property is sold is not enough to repay the outstanding loan, the estate will not be liable to pay any more.

This post first appeared on Dailymail.co.uk