Many people considering an equity release scheme often compare equity release interest rates with mainstream mortgage interest rates and are disappointed by the difference. A great number of people are dissuaded from equity release because of this reason. However, by understanding the differences between the product ranges, you will gain an understanding of why the equity release interest rates are set in this way.
The difference between a mainstream mortgage and equity release
A mainstream mortgage is an arrangement which has a set duration. They are usually set over a fixed long term period of time. However, an equity release scheme has no set time frame. The estimated duration is calculated by the potential mortality rate of the applicant. This is determined by using national statistics and applying them to the applicant’s personal details including their age and gender to determine the potential time frame of the scheme. This may mean that the equity release scheme could run anywhere from ten years to thirty years plus. While this may not seem like a huge factor which could influence the equity release interest rates, it is one of the most considerable.
Unlike a mainstream mortgage where the applicant is required to make a monthly payment to cover the interest and possibly a portion of the capital of the loan, an equity release scheme usually requires no such payment. The interest accrued on the loan is simply compounded to the balance. This can mean that the balance increases dramatically over the years.
However, there are strict regulations in place in the equity release industry to protect the consumer. Not only are advisers legally obliged to ensure that an applicant is aware of all the implications of taking out a scheme, the equity release companies cannot allow a scheme to run and incur a debt in excess of the value of the home. Many equity release companies will set their equity release interest rates a little higher than mainstream rates, to ensure that all of their potential costs are covered regardless of the duration of the scheme.
Finding the best equity release interest rate
While most equity release interest rates may be a little higher than mainstream rates, this is not always the case. There are a number of products and schemes which offer very attractive rates. There are a number of different types of equity release schemes which attract different interest. There are even some options which allow the home owner to make a monthly contribution to cover all or part of the interest charge in order to maintain the level of the loan balance. These types of product tend to have far lower equity release interest rates which are at a similar level to mainstream products.
However, the interest rate should not be the only deciding factor. Equity release can be a little more complex than a mainstream mortgage, so it is important to assess all the advantages and limitations each product has to offer. There are a number of online tools and calculators which allow home owners to explore the different equity release options. The tools are easy to use and require basic personal property information to provide illustration of the types of schemes which the home owner would qualify in addition to the equity release interest rates which would apply, the amount of release possible and any other terms.
Additionally, an equity release adviser can assist you in locating the best possible deal for your circumstances. While this may not necessarily be the lowest possible interest rate, it will be a scheme which is best suited to your requirements and circumstances.
Minimising the equity release interest
If you are concerned about the amount of equity release interest rates would apply, there are a number of different schemes which can minimise this impact. These include interest only schemes which allow home owners to make a monthly payment to offset the interest. Alternatively, there are draw down schemes which allow the home owner to have a draw down limit rather than a large initial sum. The home owner can then draw down funds when they are required. The interest is only applied to the funds which have been released, which can save a great deal in the long term.
However, if you are very concerned about equity release interest rates and charges, there are other types of equity release such as home reversion plans. This type of equity release allows the home owner the option to sell all or part of their home to the company while retaining residency rights. There is no interest charged as the legal ownership of the property reverts to the reversion company. However, should the property prices increase, it is of no benefit to the equity release client as they no longer own the property.