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

Clients who release shares could lose thousands of pounds off their house price by paying rolled-up interest instead of monthly payments.

Equity release allows homeowners age 55 or older to access a portion of the money tied up in their real estate tax-free.

Borrowers take out a loan on their home — usually up to 49 percent of its value — and they remain the sole owner. It will be repaid with interest from their estate after they die or receive long-term care – although some plans have the option of paying back some of the money early.

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

While this is the right choice for many, it does mean customers turn their backs on the total savings that can come from paying interest on a regular basis.

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

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

If a client allowed the monthly interest of £454 to accrue over the life of the loan, they would have £163,066 of equity in the property if it were sold after 16 years.

By choosing to make small interest payments of £100 a month for five years – less than a quarter of the monthly interest accrued – the remaining equity would be £177,781. That’s almost £15,000 of extra equity that can be passed down as an inheritance or used elsewhere.

If you pay £100 a month over the entire term of the loan, the balance remaining on the sale of the property would be £197,161, or £34,000 more than if interest were not repaid.

However, they should make sure they can comfortably pay the £100 a month on top of their other living expenses when they retire.

Steve Wilkie, executive chairman of Responsible Life, said: “One of the historic concerns among homeowners when it comes to taking out an equity release plan is the amount of accrued interest that will be paid when the home is sold.

Lifetime mortgage products now offer customers the flexibility to pay off some or all of the accrued interest each month to preserve more equity in the property, yet three-quarters of home equity customers still choose not to repay interest. to pay.

“It is important that customers not only understand the costs of a lifetime mortgage, but also how to manage those costs.

‘Equity release has been criticized as expensive compared to other mortgage types, especially the interest-only mortgage for a similar age group. The criticism focused on the cost of raising interest rates, but has since been overtaken.

“With the flexible amortization features now available in all Equity Release Council approved plans, customers now have cost control in a similar way to other mortgage types.”

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

On average, clients cleared £106,806 from their homes last year, using the money for a variety of purposes, such as home improvements, helping fund their retirement and leaving early inheritances.

In March 2022, regulations were introduced for all new All ERC-approved share release plans, giving customers the right to make voluntary, penalty-free partial redemptions to reduce interest costs.

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

That means that if the amount left after the property is sold is not enough to pay back the outstanding loan, the estate will no longer have to pay.