Thousands of homeowners with snowballing equity release debts could be paying an average of £30,000 over the odds because they are unaware they can switch to a cheaper rate.
More than 300,000 homeowners owe money to an equity release provider after borrowing cash locked up in the value of their home.
Yet while interest rates on offer now are at record lows of around 3 per cent, and the number of deals to choose from is at an all-time high, thousands of homeowners are still stuck on old rates of 6 per cent or more.
Overpaying: Thousands of homeowners with snowballing equity release debts could be paying an average of £30,000 over the odds because they are unaware they can switch
Legions of homeowners could save tens of thousands of pounds by switching to a better rate — even once punitive exit fees are taken into account.
And critics say the industry needs to do more to encourage borrowers to switch and save. Regulator the Financial Conduct Authority (FCA) is also being urged to act.
We’ll save £13k over ten years after remortgaging
Norman and Ann Astbury will save more than £13,000 over the next 10 years – despite having to pay an exit penalty of £4,890. This is because they switched from a 6.44 per cent rate to 2.71 per cent.
The couple first took out an equity release loan seven years ago to repay their remaining mortgage when Norman wanted to sell his car business and retire.
The couple, who live in West Bromwich in the West Midlands, were accruing interest at the higher rate to equity-release lender Just and not making any repayments.
When they saw a TV advert about switching rates they decided to get theirs reviewed by equity release broker Key.
Norman, 78, says: ‘We rang them up and they looked into it for us.
‘I couldn’t believe it when they offered us a rate that was about 4 per cent cheaper.’ Norman and Ann, 76, a retired head cook, switched their plan to More2Life.
Since their first equity release mortgage in 2014, the value of their house has risen from £110,000 to £200,000.
Norman says: ‘What we’ve been charged in interest has been wiped out by the rise in the house price, but it’s nice to have much a lower rate now, it will eat into our equity at a much slower rate.’
Equity release loans are available to those over 55 and allow the homeowner to take up to 50 per cent of the value of their home in cash.
An equity release loan, also known as a lifetime mortgage, is only paid off when the homeowner dies or goes into care.
But it can be an expensive alternative to downsizing. The loans come with compound interest charges which can mean the amount owed can double in 15 years — reducing the inheritance for loved ones.
Yet while there are currently more than 300,000 people with active equity release loans, few are shopping around once they sign up to a deal.
To switch to a cheaper interest rate, the homeowner would have to use a fresh deal to borrow the money to pay off the old, more expensive, loan.
Steve Wilkie, executive chairman of retirement mortgage broker Responsible Life, says: ‘Just because they are called lifetime mortgages does not mean you can’t switch to a cheaper plan.
Interest rates have been dropping consistently in recent years and we’ve helped some customers save five-figure sums by switching.’
Because equity release mortgages are set up to run for life they come with eye-watering early repayment charges should you wish to repay the debt in full before you die. Lenders are allowed to charge a penalty of up to 25 per cent of the original loan amount.
Aviva, one of the biggest lenders in the market, has an estimated 100,000 equity release borrowers on its books.
It says around 40 per cent of its borrowers are paying more than 6 per cent, yet it is not obliged to tell them its rates have now fallen.
Broker Age Partnership switched 2,000 borrowers last year, and Responsible Life says just 5 per cent of its business is remortgaging.
There are currently more than 300,000 people with active equity release loans, yet few are shopping around once they sign up to a deal
Broker Key says it has remortgaged 3,000 borrowers since 2017 — on average these customers were able to switch from a 5.1 per cent interest rate to 3.5 per cent, saving an average of £33,795 after ten years.
But while crushing penalties do stop some borrowers from switching, experts say it is not the biggest reason families stay on expensive plans.
A combination of the increasing vulnerability of older borrowers, who see switching as complicated and expensive, coupled with the lack of encouragement by their lender to seek out a better deal, means thousands of borrowers are missing out on millions of pounds of potential savings.
Lenders say they are not allowed to write to their customers offering them a lower rate, only an equity release broker can do that.
But according to the watchdog the FCA equity release brokers are under no obligation to ever contact their customer again after the initial mortgage has been set up.
Thousands of homeowners are still stuck on old rates of 6 per cent or more for their equity release mortgage
Experts say more should be done by the financial watchdog and lenders to protect older borrowers from needlessly losing large chunks of their equity because of historically expensive loans.
Lynda Blackwell, a consultant and former mortgage manager at the FCA, says: ‘It’s sad that vulnerable customers are ending up on high rates for life.
‘The older we get the less confidence we have and the more vulnerable we become so equity release borrowers are less inclined to switch plans. I’d like to think lenders aren’t relying on that fact and leaving their loyal customers on high rates.
‘Lenders need to step up to the plate and do something to help their borrowers and given its focus on protecting vulnerable customers, it would be good to see some action from the FCA too.’
Consumer campaigner Baroness Ros Altman, a former pensions minister, adds: ‘The equity release market does not work well for its customers. It has improved but it’s still unsuitable for a large number of borrowers.
‘It’s not just inflexible on interest rates which means borrowers racking up expensive charges, it’s inflexible if you want to sell up and move. Borrowers could end up stuck in their homes.’
Ms Blackwell says lenders should be writing to families or the adviser who arranged the loan to ensure it still offers good value.
Aviva says that it includes a sentence in customers’ annual equity release statements to remind them to get their plan regularly reviewed.
Legal & General, which has fewer than 2 per cent of its borrowers on rates of 6 per cent or more, says it is not allowed to write to customers to tell them about other deals.
Lender Just would not disclose how many of its borrowers pay 6 per cent or more but says its separate brokerage regularly contacts its borrowers to review their plans.
The Equity Release Council and Legal & General said they are looking at ways to improve communications with advisers and existing borrowers.
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