Equity release ‘safeguard’ will save homeowners millions in interest
Equity release allows people aged over 55 to borrow against the value of their homes without making repayments, unless they choose to, with the interest and loan usually settled when they pass away or move into care.
The option to make penalty-free partial loan repayments has become an increasingly common feature of modern products, according to the Equity Release Council (ERC), as people want to mitigate the effects of compound interest and cut their borrowing costs in later life.
It revealed more than 125,000 penalty-free part repayments were made in 2021, averaging £608 each time. In total, the ERC said £78m in penalty-free partial loan repayments were made last year by people with lifetime mortgages, which account for the majority of equity release products.
And these customers will make a combined saving of £39m in interest costs over the next 10 years or £99m over 20 years.
Given the scope of interest savings that can be made, along with the increased chance of customers being able to leave their homes as part of their inheritance, the ERC confirmed part repayments will be made as standard for all new equity release customers taking out plans from the body’s approved providers from today.
Nearly 700 firms have signed up to practice in line with Council standards, including all current product providers.
Jim Boyd, CEO of the ERC, said: “The right to remain in your home for life, with no requirement to make ongoing repayments and no threat of repossession, has been central to the appeal of equity release since 1991 and remains a core pillar of the modern market.
“Our new product standard adds to this by ensuring people have the freedom to reduce their borrowing if circumstances change. It enables equity release customers to mitigate the effects of compound interest and reduce their borrowing costs in later life, which we know is often one of their main concerns.
“The market’s evolution means many customers are already saving tens of millions of pounds in interest costs by making penalty-free partial repayments as and when they can afford to. By introducing the new product standard, we expect many more customers are set to benefit as all new products will have this safeguard built in.
“Equity release today is a flexible financial planning tool for a range of scenarios, from gifting to family to supporting better living standards over longer lives in retirement. Consumers should always use a Council member to discuss the pitfalls of equity release, explore their options and alternatives to equity release, to benefit from product protections and expert advice to decide if it is right for them.”
Alice Watson, head of marketing, insurance at Canada Life, said: “This is a welcome step in the right direction from the Equity Release Council and something we’ve already been working towards at Canada Life. We know that our customers value flexibility around making repayments, and both customers and the industry will undoubtedly benefit from making this the norm.”
This is the fifth product standard or requirement for all equity release plans recognised by the ERC.
The other standards include giving borrowers the right to remain in their homes for life with no repayment obligations putting them at risk of losing their property, a fixed or capped interest rate for life, and a no negative equity guarantee.
The right to port a mortgage provided it falls under accepted criteria is also one of the ERC’s product standards.