Record low equity release rates are just one option for older borrowers
Equity release rates have fallen to a record low, making it cheaper for older people to borrow against their home.
Data from market research firm Defaqto shows the average rate on offer today is 4.55%, compared to 5.4% a year-and-a-half ago.
The lowest available rate on the market is 2.84% from more2life.
Equity release is a type of loan only available to homeowners aged 55 and over. The loan is secured against their property and paid off from the sale of the property when the borrower dies or goes into long term care.
In the past, equity release products have been criticised for their high interest rates, which in some cases have compounded to leave the borrower in negative equity.
Alternative to equity release
While falling rates will be good news for older borrowers, the research suggests those who have an income and want to borrow against their home in later life may be better off going for a Retirement Interest Only (RIO) mortgage.
RIO mortgages are only available to people 55 and over who own their homes outright. Unlike with equity release, borrowers must make monthly repayments so need to have a secure income such as a defined benefit pension or annuity.
Borrowers have to pass strict affordability tests to qualify for a RIO mortgage. In the case of a joint application, borrowers must be able to prove they can afford the repayments individually.
According to Defaqto, RIO interest rates have also fallen, and the lowest rate available today is 2.79% from Marsden Building Society.
The research shows older borrowers could save thousands by choosing an RIO mortgage over an equity release loan where they have chosen not to make any monthly interest payments.
It said that a 65-year-old with a property worth £250,000 taking out an equity release loan of £50,000 at a rate of 2.99% would have paid nothing by the age of 85 but would owe the lender £90,130. If house prices over that period had increased on average by 2.5% per year, the debt would represent 22% of the equity in the property, leaving the owner with 78% of the house value.
The same person taking out a £50,000 RIO mortgage at a rate of 3.19% fixed for five years will have paid £31,900 of interest by the age of 85 and would owe the lender £50,000. If house prices had increased on average by 2.5% per year over that period, the debt would represent 12.2% of the equity of the property, leaving the owner with 87.8% of the house value.
Disadvantages of RIO mortgages
Although at current interest rates, the RIO mortgage option costs less over the long term, there are a couple of downsides borrowers need to consider before going down this route.
Firstly, they need to pay interest each month and the rate is not guaranteed beyond the fixed period so could rise over time.
Secondly, the borrower could have their home repossessed if they fail to make interest repayments.
Brian Brown, consumer finance expert at Defaqto, says: “For those in later life who own their own home but need cash, borrowing money is not easy. Most standard loans and credit deals are not available to pensioners, leaving them with little choice but to release equity from their home. Equity release has been criticised for being expensive and inflexible in the past, but with historically low rates and portable loans, they are a much more viable option for some borrowers.
“Downsizing to a smaller or cheaper property may be a better option if you are able to move. That way you can free up cash from the sale to enjoy without paying interest. This though is not always a practical option and many people simply do not want to leave a home they lived in for many years.
“Releasing equity from your home is a big decision with ramifications for the rest of your life; you should take advice from an independent and qualified professional before making any decisions.”