Equity release: can you save £10,000s by switching to a new lifetime mortgage?
Check if a cheaper deal can help you save in the long run
Homeowners use equity release to unlock billions in cash from property each year. If you've done that and you're currently paying an expensive interest rate for a 'lifetime mortgage', it might be possible to save £10,000s by switching to a better deal. This guide explains when it's worth switching and, if it pays to change deal, how to do it.
Thanks to the Equity Release Council and Bower Home Finance for their input.
What sort of equity release deal do you have?
The term 'equity release' refers to two distinct ways of unlocking cash from your home: a 'lifetime mortgage' and a 'home reversion plan'. Over the years, hundreds of thousands of homeowners have used these types of equity release to unlock cash from their property.
This guide is only relevant to one of these – lifetime mortgages (the most common form of equity release). If you've got one of these, you can skip straight to the next chapter.
Unsure whether you've got a lifetime mortgage or home reversion plan? Our Should you equity release guide explains the differences, but this table sets it out briefly:
Lifetime mortgage | Home reversion plan | |
|---|---|---|
Are you charged interest? |
|
|
Can you make monthly repayments? |
|
|
Did you get sell a share of your home for cash? |
|
|
With a home reversion plan, you sell a share of your home to a lender in exchange for a cash lump sum or regular income. You'll no longer be the sole owner of your property.
You can't switch home reversion plan – so this guide isn't for you.
New to equity release?
See our Should I equity release? guide.
Switching lifetime mortgage can help save £10,000s
With all forms of equity release, you don't have to repay what you borrow until you die. But if you've got a lifetime mortgage and you don't make regular repayments, interest compounds quickly, meaning your debt grows significantly.
Compounding is made worse if you're on a high interest rate, something that was common in the 2010s...
Typical interest rates on lifetime mortgage have often been around 6-8%. But if you find a deal with a better rate, switching could save you £10,000s in the long run.
Switching to a cheaper lifetime mortgage with a cheaper interest rate could save you and your loved ones a serious amount of money by the time you die or go in to long-term care. Over many years, a difference of 2% – or even 1% – can make a massive difference.
See the example in the table below:
Repay after 10 years | Repay after 15 years | Repay after 20 years | |
|---|---|---|---|
Interest rate: 5% | £83,350 | £105,685 | £135,632 |
Interest rate: 6% | £90,969 | £122,704 | £165,510 |
Interest rate: 7% | £100,483 | £142,447 | £201,936 |
(1) Assumes no repayments are made until the loan is paid off.
As the example shows, switching deal could result in £10,000s of savings...
However, it's not simply a matter of comparing interest rates, as it's likely there'll be fees to factor into the equation too, which can reduce or even wipe out the benefit of switching. The next chapter explains how to work out if getting a new deal truly makes financial sense.
Important. If you've got a lifetime mortgage that's now worth more than 60% of your home's value, it's unlikely you'll be able to switch deal. Use the following steps in this guide to check.
Should you switch? Use our step-by-step help
As mentioned, switching isn't just about finding a better interest rate. It's likely there'll be fees involved to switch, meaning it might take a couple of years to break even first before you actually start to save...
Use the following steps to check if switching is worth it:
Step 1: Find out what you owe and your current interest rate
This information's likely to be on the last statement you got from your lender, though you may want to contact it directly to get the most up-to-date figures. You'll need...
The amount you currently owe. This will be more than what you initially borrowed as you'll have accrued interest (unless you've made repayments to clear the interest).
The interest rate. Typically deals will have an interest rate between 6% and 9%.
Step 2: What's the fee to leave your current deal?
Another important piece of information to check is the cost to leave your current deal now (by leaving the deal, you'll be repaying your loan in full prematurely). This might be referred to as an 'early repayment charge' or 'early redemption charge'.
Typically, an early repayment charge will be a percentage of your original loan amount or outstanding balance, often between 0% and 5%. So such a charge might cost £1,000s.
Step 3: Now work out how much a new deal would cost
A big part of the cost of a new deal is of course the interest rate you'll pay.
At this point, you're mainly looking for an indicative interest rate to use to calculate whether you'd save by switching. One place to get an overview of today's lifetime mortgage rates is Equity Release Supermarket (do note that Equity Release Supermarket is a broker).
For ease, we've pulled out these indicative rates. But bear in mind they're only rough, and exact rates will depend on your age, how much you want to borrow and property type:
Age | Loan-to-value | Typical interest rate (1) |
|---|---|---|
60 | Up to 15% | 6% |
Up to 25% | 6.5% | |
Up to 35% | 7% | |
70 | Up to 25% | 6% |
Up to 35% | 6.5% | |
Up to 45% | 7% | |
80 | Up to 30% | 6% |
Up to 40% | 6.5% | |
Up to 50% | 7% |
(1) These are only indicative figures.
But this isn't the only figure you need at this stage. When you take out any new mortgage, there are normally a range of fees you'll need to pay to set it up.
You should factor these fees in to the equation when working out whether switching is worth it. So in addition to what the new rate would be, check what the following would cost:
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Arrangement fee – between £0 and £500. Also known as an application fee, this is charged to set up a new mortgage. Use £500 as a ballpark figure if you're unsure.
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Valuation fee – between £200 and £500. Charged so a lender can value your property, though it's sometimes free or repaid via cashback. High-value properties could be charged more than £500. Use £200 as a ballpark if you're unsure.
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Adviser fees – between £0 and £1,500+. It's mandatory to speak with a qualified equity release adviser in order to set up a lifetime mortgage. Adviser fees vary significantly. Some are free, but it's more likely you'll pay around £1,000 – sometimes £1,500+
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Legal fees – around £500. You'll need to instruct a solicitor, who'll sort out the legal terms of taking out a new lifetime mortgage. Budget for up to £1,000ish.
Step 4: Use our calculator to check when you'd start saving
We've built this ready reckoner to calculate what you'd pay if you stick with your current deal and what you'd pay if you switched, taking account of fees and charges too.
As you'll pay a number of fees to switch deal, our calculator works out how long it'd take to offset these – in other words, the point at which you'd break even and actually start to save. The calculator has typical rates and fees fed into it, but it'll be more accurate if you know actual rates and fees. Have a play and see what difference switching may make.
Step 5: Will you live long enough for switching to be worth it?
Your lifetime mortgage will need to be repaid when you die or go in to long-term care. Depending on how soon this happens, you may not ultimately benefit much, if at all, from switching deal if you don't manage to break even on the fees you pay to switch.
This Office for National Statistics life expectancy calculator sets out the likelihood of reaching different ages, based on UK averages. But consider your own health, and how likely you are to reach those averages. We've a summary in the table...
Current age | Average life expectancy of women | Average life expectancy of men |
|---|---|---|
55 | 87 | 84 |
60 | 87 | 84 |
65 | 88 | 85 |
70 | 88 | 86 |
75 | 89 | 87 |
80 | 90 | 89 |
85 | 92 | 91 |
90 | 95 | 94 |
95 | 98 | 98 |
100 | 102 | 102 |
Life expectancy data provided by the Office for National Statistics.
How to switch lifetime mortgage deal
The process of switching lifetime mortgage is similar to first applying for a lifetime mortgage.
That's the case even if you're switching to a new deal from the same lender, as they'll effectively treat you like a new borrower. For example, you'll need to undergo most of the same checks as before and seek advice from an independent advisor.
If you've decided switching might be right for you, here's what you'll need to do:
1. Speak to an equity release adviser
Before applying for any form of equity release, you must first speak to a qualified adviser – preferably one carrying the TrustMark of the Equity Release Council (see right).
You can search for advisers on the Equity Release Council and Unbiased.co.uk* websites.
Before picking one, it's worth asking:
- Do you offer a free consultation? Which you could use to ask if switching is worth it.
- Do you charge a fee? Most advisers do, but there are some that don't.
- Can you access deals from all lenders? You preferably want the answer to be 'yes'.
2. Instruct a solicitor
You'll need a solicitor to carry out the legal work involved in switching deal, preferably one experienced in this area and carrying the TrustMark of the Equity Release Council.
You can search for solicitors on the Equity Release Council website.
3. Decide which lifetime mortgage is best for you
Your adviser will show you the most appropriate deals for your circumstances. You should preferably opt for a lender that offers guarantees such as the following:
- No-negative equity guarantee. So you'll never owe more than your home is worth.
- Home for life. You'll have a right to stay in your home until death or long-term care.
- Option to move home. Provided the property meets certain conditions.
Lenders approved by the Equity Release Council offer all these guarantees.
It's also sensible to discuss your plans with your loved ones, but you don't have to.
4. Your adviser will apply for the lifetime mortgage
Once you've decided which deal is best, you'll need to fill in an application form, which your adviser can help with. Your adviser will then send the application off on your behalf, along with any fees – such as an arrangement fee – that need paying up-front.
5. You'll receive a mortgage offer
Once the lender has instructed a surveyor to carry out a valuation of your property and decided on the amount it's willing to let you borrow, you'll be sent an offer letter. Your solicitor will sit down with you to discuss the details of the offer, highlighting any obligations the lender requires of you. If you're happy, you'll be asked to sign your agreement.
6. The funds will be released to pay off your old loan
Once any final legal checks have been completed, the funds will be released to your solicitor, who'll then transfer them to your old lender to pay off your old lifetime mortgage.
You'll now have a new equity release deal which should see interest accrue more slowly.
Switching lifetime mortgage FAQs
It'll take around eight weeks from submitting the application to switch deal, though timescales can differ depending on your circumstances.
These days most new lifetime mortgages are portable, meaning you should be able to take the deal with you if you decide to move home in future.
In practice though, lenders tend to have fairly strict criteria when it comes to properties they're willing to lend on, which might restrict you.
Properties that you're unlikely to be able to port a lifetime mortgage to include:
- Studios and basement flats.
- Some properties in local authority/housing authority blocks.
- Retirement properties.
- Static/mobile homes.
- Houseboats.
- Farms.
- Hotels, guest houses and B&Bs.
If you think you'll move before you die or move into care, check the lifetime mortgage you're switching to is portable and if there are any restrictions.
These days lifetime mortgage deals tend to come with 'downsizing protection'.
This means if you want to move home but need to repay your lifetime mortgage to do so – perhaps because your lender doesn't like the property, or isn't willing to lend enough money – you won't face an early repayment fee. Normally you'll need to have intended to take your lifetime mortgage with you.
So when switching lifetime mortgage deal, if you think moving home in future is a possibility then check any new deal comes with downsizing protection.
Switching lifetime mortgage deal isn't the only way of reducing the overall cost of equity release in the long run. To cut the costs, you could:
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Start making repayments. Most lifetime mortgages allow you to make repayments. By making repayments, the size of your equity loan debt won't grow as quickly. However, there are normally restrictions on how much you can repay penalty-free – typically capped at 10% each year.
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Get rid of your lifetime mortgage. This might be possible if you've come into some cash, possibly from an inheritance or life insurance policy. Or you might sell your home to release cash to clear the lifetime mortgage.
But doing this requires careful consideration, as you might have to pay an early repayment charge (ERC). This can cost £1,000s, sometimes £10,000s, though it might be worth paying if you have concerns about how big your equity release debt will be in 10, 15, 20 years' time etc.
Ask your lender for a settlement figure and if there's an ERC.
How long does switching equity release deal take?
Do I need a deal that is portable?
What is 'downsizing protection'?
Are there other ways of reducing what I owe?
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