Equity release explained Lifetime mortgages
Fixed vs variable rates of interest
Your level of equity could fall quickly as your level of debt grows
Most lifetime mortgages have a fixed rate of interest, though the Holmesdale and Vernon Building Societies and Scottish Widows Bank offer variable-rate products. At 4.49% to 4.99% in March 2010, the variable rates are currently lower than the fixed rates, but their next move is likely to be up when the base rate increases.
While variable-rate schemes give you less certainty, choosing one with no early repayment charges (ERCs) means you can switch without penalty if necessary.
The lowest fixed rate for a lifetime mortgage in March 2010 was 6.54%, compared with 6.69% for a five-year fixed-rate conventional mortgage if you’re borrowing 90% of the property’s value. However, these products aren't directly comparable, as when you take out a mortgage to buy a property, the interest is charged on an amount that decreases with time (or stays the same in the case of an interest-only mortgage). With a lifetime mortgage, however, interest is charged on an increasing amount.
Most have application fees, which range from £500 to £695. You’ll have to pay legal fees and, in most cases, a valuation fee.
Early repayment charges
With the exception of the Holmesdale and Vernon Building Societies, all lifetime mortgage schemes have ERCs if you repay the outstanding loan (including charges and the interest that has built up) before you die or move into long-term care, which could cost you thousands. Newbury Building Society even charges ERCs when you move into long-term care.
Some methods of charging are easier to understand than others. For example, Hodge’s Lifetime Mortgage Option, Newbury Building Society and New Life Mortgages all charge 5% of the loan if it’s repaid within the first five years only. Other products charge in the first 10 years – LV= charges 5% in the first five years then 3% in years five to 10.
However, Aviva and Just Retirement have complicated systems that depend on long-term gilt rates. You could pay more or less than with other providers, or even nothing at all with this system. Our view is that schemes with complex ERCs like these should be avoided.
- For more information on equity release, talk to our experts on the Which? Money Helpline
- Exploring your options? Read our expert guide, introduction to personal pensions
- For alternative options, take a look at our guide to annuities
