New en­trants cause eq­uity re­lease in­ter­est rates to fall

The Sunday Telegraph - Money & Business - - News And Comment - Adam Williams

Eq­uity re­lease in­ter­est rates have con­tin­ued to fall for new cus­tomers, with com­pe­ti­tion in the sec­tor cred­ited with forc­ing ex­ist­ing providers to lower their prices.

Tap­ping into prop­erty wealth through eq­uity re­lease has be­come a more main­stream op­tion, with £3.1bn with­drawn by home­own­ers in 2017, up from £1.6bn in 2015. How­ever, the high cost is of­ten cited as a ma­jor rea­son for con­sumers to avoid tak­ing out a plan. Fall­ing rates could tempt even more older home­own­ers into the mar­ket.

Fig­ures from the Eq­uity Re­lease Coun­cil (ERC), the in­dus­try group, said the aver­age rate of­fered to new cus­tomers was 5.22pc in July. This is con­sid­er­ably lower than the 5.96pc aver­age recorded a year pre­vi­ously. Si­mon Chalk of Later Liv­ing Now, an eq­uity re­lease ad­vice firm, cred­ited the re­cent ar­rival of firms such as Le­gal & Gen­eral and One­fam­ily as hav­ing forced ex­ist­ing providers to raise their game. “New en­trants have come into

the mar­ket seek­ing to of­fer some­thing dif­fer­ent,” he said.

How­ever, con­sumers should al­ways con­sider the over­all cost of eq­uity re­lease. Even if rates are ini­tially low, the way in­ter­est is charged means the cost can soon mount up. Eq­uity re­lease plans “roll up” charges, which means that in­ter­est com­pounds and the over­all debt in­creases quickly.

For ex­am­ple, a home­owner who re­leases £100,000 of eq­uity from a £250,000 prop­erty with a typ­i­cal rate of 5.22pc would face in­ter­est charges of about £5,200 in the first year of their plan. By year 15 this would have spi­ralled to £10,600 a year.

Although no cap­i­tal needs to be re­paid while the bor­rower is liv­ing in the home, the en­tire value of their prop­erty would be whit­tled away af­ter about 18 years by the in­ter­est.

As well as driv­ing rates down, new providers have helped boost the choice of plans. ERC data shows the range dou­bling in the last two years.

But with rates fall­ing Mr Chalk sug­gested that some peo­ple would be bet­ter off wait­ing to take out a plan, un­less they needed the cash ur­gently.

“If home­own­ers can af­ford to wait, they will ben­e­fit by de­fer­ring the ef­fect of com­pound­ing rolled-up in­ter­est, but this could be negated should rates in fu­ture be much higher,” he said. “If some­one re­ally needs the money now, they should do it now. If not, wait.”

How­ever, fall­ing rates will of­fer lit­tle com­fort to ex­ist­ing pol­i­cy­hold­ers, who are still pay­ing much higher rates. As Tele­graph Money re­ported ear­lier this month, those who took out loans be­fore the fi­nan­cial cri­sis can be pay­ing 7pc or more, with high exit charges pre­vent­ing them from switch­ing to a cheaper deal else­where.

Those con­sid­er­ing re­leas­ing cash from their homes should wait if they can

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