Lifetime mortgage borrowers could be missing out on valuable savings by failing to switch their deals to a lower rate. The number of older borrowers who swapped their lender for one offering a better deal fell by 34 per cent in the first three months of this year.
The figures, released by the Financial Conduct Authority (FCA), also show the total number of lifetime mortgage switchers fell almost 30 per cent across the year. Switching deals dropped from 1,824 to 1,297 in the 12 months to March.
Lifetime mortgage specialist Responsible Life says this means that around four in every 100 equity release customers are switching each year, out of more than 300,000 outstanding mortgages.
Switching and early repayment charges
Steve Wilkie, executive chairman of Responsible Life, says many people are put off switching their lifetime mortgage lender by the risk of having to pay significant early repayment charges. Products in the lifetime mortgage sector are designed to last a lifetime and carry higher early repayment charges as a result.
However, Mr Wilkie says younger borrowers could certainly save by switching – despite repayment charges.
“If there is longer left on the new loan, then it may deliver the savings that make switching worthwhile.
“This is why remortgaging may be advisable for a customer aged 75,
but not recommended for another customer aged 85 – even if their
product and circumstances are otherwise the same.”
When to switch your lifetime mortgage lender
If the savings available over the expected life of the mortgage don’t exceed the value of the early repayment charge, then switching will not be recommended by any adviser.
Mr Wilkie says that the charge, life expectancy and difference in available interest rate will be used to decide whether switching is worthwhile.
He points out that most lenders’ loan to value bands (LTV) have also improved as interest rates have fallen and Land Registry data shows that the average UK property price rose by 13.2 per cent in the year ending in June, to £265,668.
Mr Wilkie says: “This means homeowners can get more out of their property for a lower interest rate. If house price growth is factored in, too, the LTV band available can improve even further. Lower rates have, in part, been due to the virtuous circle of greater volumes and increased competition. The popularity of lifetime mortgages has exploded in the last five years and product flexibility has never been greater.”
Gary Hemming, commercial lending director at ABC Finance, agrees that lifetime mortgages can be a great tool for raising cash in later years. But it is important that borrowers consider how much they will owe when the loan is repaid, and how this will impact on the value of their estate.
As there are no repayments to make, compound interest means that the amount owed increases each year at a faster and faster rate.
Mr Hemming says: “This often leads to major headaches down the line, with people often owing far more than expected.” He urges anyone wanting to take out a lifetime mortgage to get independent professional advice.
He adds: “Never feel pressured into proceeding. Take your time to fully understand any products recommended and get a second opinion or talk to your family if you are not entirely comfortable with making the decision alone.”
Case study: Lifetime mortgage helped us create a dream home
Graham Goodier and his partner Lesley Fogarty renovated to create their dream home. The couple, who live in Newport Pagnell in Buckinghamshire, released £159,125 from their £475,000 four-bedroom bungalow.
Graham, a former electrician, said the renovations would not have been possible without a lifetime mortgage.
“A retirement mortgage wouldn’t have given us the money we needed. The lifetime mortgage allowed us to borrow more and it has worked really well for us.
“I think lifetime mortgages are the best thing since sliced bread. It’s a brilliant way to do a renovation and you can add so much value to your home.
“In some ways it’s the most responsible way to use a product like this. That money hasn’t disappeared. We’ve got a lovely bungalow now and I can see that money all around me. It’s fantastic. We appreciate it all, every day. It’s our dream home.”
The bungalow has now been valued at more than £600,000. The couple both sold property and pooled their money to buy their home.
Graham sold a two-bedroom bungalow and Lesley a two-bedroom terrace house. Graham had a small lifetime mortgage on his bungalow, which he repaid, incurring a small early repayment charge.
He adds: “I had a lifetime mortgage on my bungalow so I knew the ins and outs of it. I’d considered it years earlier, too, but it was the ‘no negative equity guarantee’ that changed everything for me. It’s important to me that loved ones aren’t impacted in any way.”
Graham lives for the moment and wants to enjoy life, having survived two heart attacks and prostate cancer.
“I’ve really been through the mill and I’m determined to enjoy life. I don’t worry about anything.
“Lesley doesn’t have children, and my children are financially secure. They have told me to just enjoy life while it lasts.”
Lesley, who used to work in banking and has been with Graham for 10 years, adds: “We saw the potential in the bungalow and are really pleased with what we’ve done here.
“Borrowing the money with a lifetime mortgage has helped us to achieve its transformation.”