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? |
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Can you make monthly repayments? |
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Did you get sell a share of your home for cash? |
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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 good place to start is the Equity Release Supermarket. At this point you're mostly looking for an indicative interest rate to use in the calculation of whether you can save, and it has tables of lifetime mortgage deals currently available (Note: Equity Release Supermarket is a broker and can arrange a new equity release deal for you, but you're under no obligation to give it any of your details, or to use its services – it's best to read the rest of this guide before finding a broker).
To help, we've pulled out these typical rates. Only use these as an estimate though, as any rate will depend on your age, amount you want to borrow, and property type:
Age | Loan-to-value | Typical interest rate (1) |
|---|---|---|
60 | Up to 15% | 5.5% |
Up to 25% | 6% | |
Up to 35% | 6.5% | |
70 | Up to 25% | 5.5% |
Up to 35% | 6% | |
Up to 45% | 6.5% | |
80 | Up to 30% | 5.5% |
Up to 40% | 6% | |
Up to 50% | 6.5% | |
(1) These are only indicative figures. | ||
Yet, that's not the only figure you need at this stage. Just like with any other mortgage, there are likely to be fees to pay to the new lender, and to those who do the financial and legal hard yards for you:
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Application (or arrangement) fees – between £0 and £500. Also known as an application fee, this is charged to set up the new lifetime mortgage, though some lenders do this for free. If the details of this fee aren't listed, use £500 as a ballpark.
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Valuation fees – between £200 to £500. This is charged so that a lender can value your property, though it's sometimes repaid via cashback or the valuation is simply free. Higher value properties (approximately £2 million+), could be charged more than £500. Again, if you're not sure, use £200 as an average.
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Adviser fees – between £0 and £1,500+. As part of the application process, you'll need to speak with a qualified equity release adviser (more on this in the chapter below). Adviser fees vary significantly. Some are free, while many charge around £1,000 – you can pay £1,500 and sometimes even more.
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Legal fees – around £500. You'll need to instruct a solicitor (again, more details below), who'll sort out the legal terms of taking out a new equity release deal. Costs average around £500.
Step 4: Use our calculator to see when you'd start to save by switching
We've built this ready reckoner to help you compare how much you'd pay on the old deal with how much you'd pay on the new deal, taking in to account all fees and charges.
The calculator will also tell you how many months or years it would take to offset the impact of any fees, after which you actually start saving by being on a better rate.
The calculator already has typical rates and fees put in to help you, though obviously the less tailored these are to your situation, the more your actual savings could differ. Have a play with the figures and see what difference it makes to when you'd start to save.
Step 5: Will you live long enough to actually save?
You – or your estate – need to pay off your lifetime mortgage when you die or go in to long-term care. If you're in a couple, it's when the second person dies or moves to a care home. And if this is sooner rather than later, then you may not see much (or any) financial benefit from changing deal as you'd still be paying off the fees associated with the switch.
This basic Office for National Statistics life expectancy calculator sets out the chances of you 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 | 87 | 85 |
70 | 88 | 86 |
75 | 89 | 87 |
80 | 90 | 89 |
85 | 92 | 91 |
90 | 97 | 94 |
95 | 100 | 98 |
100 | 102 | 102 |
Life expectancy data provided by the Office for National Statistics.
How to switch lifetime mortgage deal
If you've taken the two figures from the calculators and on balance it's likely you'll live to see savings, see that as a jumping off point to investigate further.
The process of switching equity release deal is almost identical to if you were taking out a lifetime mortgage for the first time. That's the case even if you're switching to a new deal with your existing lender, as they'll effectively treat you like a new borrower. The only difference is that the cash from the mortgage goes to pay off your old deal rather than being given to you as cash.
If you've decided switching might be right for you, here's what you'll need to do:
Appoint an equity release adviser. Before applying for any form of equity release deal, 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 or Unbiased.co.uk* websites. Before selecting an adviser, ask:- Do you offer a free consultation? If it does, this lets you explore whether switching could work, at no cost.
- Do you charge a fee? If so, how much? Typically advisor fees will set you back between £1,000 and £2,000, though there are some that don't charge a fee at all.
- Are you whole-of-market / can you access equity release deals from all lenders? You want a 'yes' answer. There are some advisors who are tied to a limited panel of lenders, or even tied to a specific lender.Instruct a solicitor. You'll need to appoint a solicitor to carry out the necessary legal work involved in taking out a lifetime mortgage. Again, it's best to instruct a solicitor with experience in this area and who carries the TrustMark of the Equity Release Council. You can search for solicitors on the Equity Release Council website. One of the meetings with your solicitor will likely be face-to-face.
Decide which lifetime mortgage is best for you. Your equity release adviser should present you with the most appropriate deals for your circumstances. It's best to discuss the issue with your family and anybody else who might be relevant at this point, but you don't have to.
When picking a lender, make sure it's one approved by the Equity Release Council (virtually all lenders are – ask your adviser if you're not sure). Lenders with this approval must give certain guarantees, including a no-negative equity guarantee (so your estate will never owe more than your home is worth), as well as the right to stay in your home until death or long-term care, and the option to move properties (provided it meets certain conditions), among other things.Your adviser will apply for the lifetime mortgage on your behalf. Once you've agreed which deal you'd like you to apply for, you'll need to fill in an application form, which your financial adviser can help with. Your adviser will then send the application on your behalf to the lender, along with any fees – such as an application fee – which must be paid upfront.
You'll receive an 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.
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.
If you've done all that, you now have a new, cheaper equity release deal which should see interest rack up more slowly.
Switching lifetime mortgage FAQs
Between submitting your application and receiving the funds, you'll likely be looking at around eight weeks. But it can be shorter or longer than this, depending on your circumstances, such as the kind of property you live in.
You'll find these days that most lifetime mortgages are portable, meaning in theory you should be able to take the lifetime mortgage with you if you decide to move home in future.
However in practice, equity release lenders tend to have fairly strict criteria about what properties they're willing to lend on, so this might restrict you.
Properties that you'd unlikely be able to port your lifetime mortgage to include:
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Studio or basement flats
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Flats of maisonettes in a local authority or housing authority block of more than four storeys
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Retirement properties
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Static/mobile homes
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Houseboats
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Farms
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Hotels
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Guest houses/B&Bs
If you believe it's likely you'll move at some point before you die or move into long-term care, check that the lifetime mortgage you're switching to is portable and when the lender allows this.
These days many lifetime mortgage deals come with something known as downsizing protection.
This essentially means that if you want to move property in future, but in order to you'd need to partially or fully repay your lifetime mortgage, you'd be able to move and repay the loan without being charged an early repayment fee. Reasons you might need to partially or fully repay include the new property not fitting your lender's porting criteria, or the lender being unwilling to lend as much money on the new property.
To qualify, you need to have the intention of taking your lifetime mortgage with you to the new property (in other words, you'd want to port the lifetime mortgage).
So when considering switching lifetime mortgages, if moving home is something you believe is a possibility in future, check the new deal comes with downsizing protection.
Switching equity release deal won't be the right option for everyone, but that doesn't mean there aren't other ways of reducing the overall cost of your lifetime mortgage in the long run. You could:
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Start making (or increase) repayments towards your lifetime mortgage. If your lifetime mortgage allows this (some older ones don't, so check with your lender), making repayments towards the interest and/or capital can really cut costs.
Normally, though, there's a restriction on how much you can repay each year without penalty – typically it's capped at 10% of the outstanding mortgage balance. Check with your lender what's allowed. -
Pay off your lifetime mortgage in full. Usually this will require selling the property to release the cash to pay the mortgage off. Though, of course, you may have just had a windfall, for example from a life insurance policy or an inheritance.
However, this isn't a decision to be made lightly, as you may well have to pay an early repayment charge (ERC) when you pay off the loan. This could be in the £1,000s, or even the £10,000s, but could still be worth paying if you've concerns about how big your final equity release bill will be in 10,15 or 20 years' time.
If you're considering paying off your full loan, ask your lender for a settlement figure and whether there's an early repayment charge to pay on top of that.
How long does the switching process take?
Do I need a deal that is portable?
How does 'downsizing protection' differ from a 'portable' deal?
Switching deal isn't worth it for me – how else can I reduce what I owe?
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