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Switching Equity Release To A Lower Interest Rate

Before we tackle the concept of switching to a lower interest rate with equity release, let’s discuss why switching equity release plans can be a good idea in general.

You Could Get a Plan that is Better Suited to Your Lifestyle

We would hope that you had already researched equity release adequately before signing up to the scheme, and that your selected plan would work well for you and your family.

However, some people only realise how unsuitable their equity release plan is after they have received their loan, and they appreciate the opportunity to switch plans.

For example, you may have chosen a regular payment scheme as a way to boost your retirement income, but then you realise you want to fund a large project such as home improvements. In this situation, it may be best to switch to a lump sum lifetime mortgage.

What’s more, there are additional features that are mainly found in modern equity release plans, such as inheritance protection, a no negative equity guarantee, and downsizing protection. It may be necessary to swap plans if you are passionate about any of these benefits.

For example, if you want to move house without paying an early repayment fee, you could find a plan with downsizing protection to ensure you would be able to move in the future without being charged a fee.

If your area has an unreliable property market, you could switch to a scheme with a no negative equity guarantee. This means you would never have to pay back more than the original amount you borrowed, even if your property decreased in value significantly.

It Could Ensure Lifelong Contentment

The trouble with being unhappy with your equity release plan is that you will have to deal with it for the rest of your life – that is, unless you decide to switch plans.

With a traditional loan, you may decide to stick it out for a few months, and at the end of this period, you would be free from the scheme. However, equity release tends to last your whole life, so if you are unhappy with your plan, switching to a new one could bring you contentment in retirement.

It may sound extreme, but consider all of the different plans you can have with equity release. You could go from an income plan that helps you to pay the bills each month to a second home plan, which would allow you to split your time between two different homes, and one can even be abroad.

You Could Borrow More Money

The amount of money lenders will consider loaning to you varies, so it is possible that you could find a lender who is willing to give you more money than your current lender is.

Sometimes this is possible if you qualify for certain things, such as having a disability or having a particularly good credit rating.

However, please don’t expect an enormous increase in your loan, as the most important factor that determines your loan amount is the value of your property, so most lenders will quote a similar amount. We still encourage you to shop around in case one lender is willing to offer a large amount of money.

Why You May Want to Avoid Switching Equity Release Plans

Now that you know the reasons to consider pursuing a change in equity release plan, we want to outline some reasons you may decide to avoid this.

1. Your Lender Isn’t Flexible

If your equity release lender isn’t very flexible when it comes to making changes to your plan or switching lenders, it may be unwise to go against their regulations. This is because you may have to pay a large fee.

For example, some equity release lenders charge an early repayment fee if you decide to finish the scheme early. The cost of this varies, but it tends to be 25% of the initial amount of money borrowed, so it’s certainly something you want to avoid.

2. You Have a Buy to Let or Second Home Plan

If you have already taken out a buy to let or second home lifetime mortgage, you will have purchased a second property and begun to put it to use i.e. living in it or renting it out.

This means it would be very difficult to switch to another plan, as you will have already spent a large portion, if not all, of your loan on this new property.

3. The New Plan Has Fewer Benefits

When considering a new equity release plan, make sure it has all the benefits of your current plan, unless there is a benefit that hasn’t improved your experience of equity release.

For example, it would be unwise to switch to a plan with no inheritance protection if you have already set aside money for your family, and communicated this to them. Not only would this be unfair to your family, but it would be complicated to change the decision.

In the event that you have protected a large amount of money for your family after taking out equity, switching plans could mean you are no longer entitled to protect funds for your beneficiaries.

On a less extreme note, it may reduce your loan amount which would have a knock-on effect on the amount of money that would be reserved for your family. This is just one example of why you should carefully consider switching plans when it comes to the benefits the lender would offer you.

Are You Eligible to Switch Equity Release Plans?

Another important thing to consider is whether you are eligible to switch equity release plans in the first place. The only way to do this is to speak to a qualified equity release adviser about your situation and explain that you are interested in switching equity release plans.

Why not do this during our free initial consultation? That way, you benefit from a free appointment, so you are not spending any more of your equity loan that you may need to dip into when you switch plans.

It is important to note that you can only switch plans if you have been an equity release customer for 12 months or more. This means you must have received your loan over a year ago.

Other than this requirement, most people are entitled to switch equity release schemes, even if it means paying out in order to do so. Equity release is no longer as inflexible as it was in the past, so there is usually a way to exit the scheme, or even to change your experience of the scheme.

For instance, you could request to move house and this would alter your loan amount. Moving to a lower-value house would reduce your loan amount, and a higher-value property would increase the amount you can borrow.

If you are interested in downsizing to a lower-value home, please keep in mind that you may have to make a repayment to the equity release lender as they would be affected by the change in value when you pass away or enter long-term care.

This is because they would be selling your home and taking most of the money to cover the loan amount.

How Can You Switch Equity Release Providers?

If you have found out that you are able to switch providers based on your current provider’s criteria, then the best thing to do is get an appointment with an equity release specialist and ask how you can do this.

They may be able to help you find a suitable lender for you, whether that be a lender with more flexible criteria, better interest rates, or a wider eligibility criteria.

If your adviser believes it is in your best interests to stay with your current lender, they will inform you of this, so rest assured that you can rely on professional guidance when making the decision to stay with your equity release provider or switch providers.

Switching Equity Release to a Lower Interest Rate – What are the Pros?

Switching equity release to a lower interest rate is a great idea if you are currently paying a large amount of interest and you are worried about this value adding up. Here are some advantages of making this decision, but please remember that these advantages do not apply to everyone.

1. You Could Save a Large Amount of Money

If your equity release plan requires you to pay a large amount of interest, this amount will accrue over time and could result in you being in an enormous amount of debt. By switching equity release to a lower interest rate, you could end up owing less money at the end of the scheme.

As compound interest is charged on your loan at the end of equity release, opting for a low interest plan will ensure the compound interest value is as low as possible.

2. You Could Benefit From New Deals

If you released equity years ago, the deals that were available were not as attractive as they are today. This means your current plan may have a much higher interest rate than most modern plans.

By switching to a modern plan, you could reduce the amount of interest you are paying, as well as accessing other benefits. This means you would not be worse off than a brand-new equity release customer who benefits from the new and improved equity release schemes.

Switching Equity Release to a Lower Interest Rate – What are the Cons?

As we have explained, equity release is designed for life, so it is not always a good idea to switch schemes. You may not want to switch to a lower interest rate for the following reasons.

1. The Interest Rate May Change

If you move onto a plan with a variable interest rate, you cannot guarantee that your interest rate will stay low. This means you may end up paying to switch plans, only to discover that you are soon paying the same interest rate again.

2. You May Lose Other Benefits

The interest rate is not the only important thing to consider when comparing equity release plans. Perhaps you pay a large amount of interest, but your loan is also higher than it would be with another arrangement.

Another example is that you may pay more interest, but you get to receive your money in the form of a cash reserve, which is more suited to your lifestyle than a lump sum arrangement.

Put simply, there is more to an equity release plan than the interest rate, and by switching equity release to a lower interest rate, you could risk losing some of your favourite aspects of equity release.

What is the Standard Interest Rate For Equity Release?

There is no set interest rate for equity release, as it varies depending on the lender you are with and the plan you are enrolled on. Some rates are fixed, and others are variable.

To give a general figure, equity release interest rates tend to range from 3-7%. However, it is very unlikely that you would have to pay 7% interest on your loan – this is just the maximum figure on the market.

Which Equity Release Plans Have the Best Interest Rates?

If you do not want to owe a large amount of interest with equity release, you can try to enrol on a plan with low-interest rates. Here are some examples.

1. Home Reversions

With a home reversion, you receive all of the money at once in the form of a cash lump sum. This means you do not have to continue to pay interest on the loan, as you will already have all of the money to yourself.

If this is something you are interested in, don’t forget to look into the downsides of home reversions. For example, you will no longer be the owner of your home, and your possessions will have to be moved out very quickly when you pass away, ready for a quick sale.

What’s more, your loan amount will be less than the market value of your property, which is particularly bad if the value is expected to increase over time.

On the other hand, you will be able to spend the money on a large project as you get it all in one go, and there is only one type of home reversion so the application process may be simpler for you.

2. Lump Sum Lifetime Mortgages

Lump sum arrangements tend to come with fixed interest rates, which can be a disadvantage if the average interest rate drops, but it also means that the rate may be lower than average for a long period of time.

Some general advantages of a lump sum lifetime mortgage are: you get all your tax-free funds at once, and the availability is high as it is a very popular equity release scheme.

3. Enhanced Lifetime Mortgages

This scheme is designed for people who are older than the average equity release consumer, or people who have specific disabilities. They may be able to enjoy lower interest rates by taking out an enhanced lifetime mortgage.

A disadvantage of this scheme is that it is not accessible to everyone, and it is not guaranteed that you would qualify for the benefits.

However, if you do qualify, this scheme would be extremely advantageous compared to other equity release plans. It can also be great for disabled people who tend to have to pay out for their disability, as the potential offer of lower interest and a higher loan would combat this.

Which Equity Release Plans Have the Worst Interest Rates?

Before we dive into the plans with the worst interest rates, please remember that they may offer other benefits such as high loans, so you shouldn’t write them off immediately unless the interest rate is the most important aspect of equity release for you.

1. Enhanced Lifetime Mortgages

You may be surprised to see this scheme on the list, given that we’ve just stated it is known for low-interest rates. The truth is that the average interest rate on an enhanced mortgage is one of the highest on the market, but there are more opportunities with this plan to qualify for lower interest rates.

2. Drawdown Lifetime Mortgages

The interest rate on drawdown mortgages is variable, which can be positive or negative depending on the state of the economy and property market. However, it tends to be negative, so we commonly see high-interest rates associated with drawdown lifetime mortgages.

Drawdown lifetime mortgages are a great option for anyone wanting to benefit from both a lump sum and regular payments. With a drawdown arrangement, you first get a lump sum of tax-free cash, and then you get a cash reserve that you can take money from whenever you need it.

On the other hand, if you are looking for more income to pay the bills, a plan with solely regular payments may be better suited to you, such as an income plan.

What’s more, you may be penalised for repayments, so if you are keen to pay back some of your loan or interest, a voluntary repayment plan or interest-only plan would be superior.

Tips For Finding a Low-Interest Equity Release Plan

Aside from selecting an equity release plan that is known for its low-interest rates, there are other things you can do to ensure you are not paying a large amount of interest on your equity loan.

1. Seek Advice From a Professional Equity Release Adviser

Equity release advisers will be able to tell you what the best plans are for low-interest rates, and whether you qualify for them. They will also be able to advise you on deciding between a fixed rate or variable rate of interest.

Equity release specialists tend to be aware of the interest rates available in the area, as they are familiar with local lenders and plans. This means they can help you apply to a lender with low-interest rates.

Always make sure your equity release adviser is a member of the Equity Release Council (ERC).

This means they are well-regulated so you can trust them to be honest about interest rates, and if you have any complaints, you can go straight to the Equity Release Council board and trust that your voice will be heard (1).

We also encourage you to check that your adviser is regulated by the Financial Conduct Authority (FCA) (2). Again, this helps with complaints as there will be an established complaints process to follow, whereas an unregulated adviser may get away with scamming you.

Please be wary of equity release advisers who try to force you to opt for a certain plan, as the choice should be yours. On the other hand, it is equally important that they are open and honest about equity release, rather than allowing you to apply for a plan or a lender that you are not eligible for.

2. Enrol In a Repayment Plan

This does not lower the interest you are paying, but it does allow you to repay it regularly so that it doesn’t add up over time.

Repayment plans are becoming more popular with equity release customers as people do not want to leave their families with a small amount of money, and repayments ensure the overall amount of debt is reduced.

You can do this through an interest-only scheme, which involves paying either some or all of the interest back each month. This scheme is a type of lifetime mortgage, and it is available all over the UK and abroad.

Another option is to take out a voluntary repayment lifetime mortgage. This does not significantly affect the interest on a day-to-day basis, but it does mean you will be charged less compound interest overall as your loan amount will be reduced.

If you do not have a steady income, the voluntary repayment option may be better for you. This is because you are not obligated to repay the loan, and if you do decide to repay, you can choose the amount.

Conversely, the interest-only lifetime mortgage demands that you repay a percentage of the interest each month, with some equity release consumers choosing to repay it all. If you do not have a solid monthly income aside from the equity loan, this will not be feasible for you.

3. Improve Your Credit Rating

If your credit history is poor, you may find that you will be charged a large amount of interest to compensate for this. On the other hand, people with a great credit score may be entitled to benefits when it comes to taking out equity.

We recommend finding ways to improve your credit rating, if at all possible, as this increases your chances of accessing low-interest rates as an equity release consumer. Here are some ways you can improve your credit score:

Using credit cards: You may worry about using credit cards as it implies you cannot save enough to manage your finances independently. However, the truth is that using credit cards is a great way to boost your credit score, and many people do this despite being good at managing money. When you use a credit card and repay the money, you are demonstrating that you are trustworthy when it comes to being a borrower, and this makes equity release companies more likely to lend you money. Having said that, your credit score is less significant for equity loans than other loans, as you will not need to repay the money, so it is less relevant to prove that you can be trusted to make repayments.
Only borrowing what you can repay: It goes without saying that you should never borrow more than you can afford. This is because you will miss the lender’s deadline, and this will look bad on your credit history. Alternatively, you would have to find another way to get the income, such as through borrowing from family and friends. It is best to avoid this as it can impact your personal relationships, as well as resulting in long-term debt.
Checking your credit score regularly: We always encourage our clients to check their credit score regularly, whether this be every six months or every year. This is because if there are any mistakes in your application to a lender, you could be rejected despite qualifying for a loan. It is best to avoid this by checking for errors on a regular basis, and especially right before you make an application to a lender. If you find any mistakes, you can ask the provider to update them to ensure your details are as accurate as possible (3).
Relying on any savings you have: Some people are not in the position to rely on savings, but if you are, we strongly encourage you to do this. It means you won’t have to get into debt, which is good news all round. This can be helpful for boosting your credit score as you won’t be borrowing money that you may not be able to pay back.
Registering to vote or providing proof of residency: Getting on the electoral roll is a simple and quick way to improve your credit rating, as it is a reliable proof of identity that lenders can compare your details to. If you cannot vote in the UK, your best bet is to make a note on your application explaining that you are not eligible to vote, but that you have proof of residency at the lender’s request.
Applying to a lender before a significant life change: Lenders always prefer for borrowers to have a steady income, and this is of course helped if you are earning a high income. If you know that there is going to be a decrease in income due to a redundancy or maternity leave, for example, it would be wise to apply for a loan before this event occurs (4).
Join the Money Saving Expert’s Credit Club: Finally, you could join the Money Saving Expert’s Credit Club. This club is designed to help people monitor their credit score and find ways to improve it. It is completely free of charge, so don’t worry about having to find the funds to afford this.

Releasing Equity With Equity Release Warehouse

We would be more than happy to help you find the right equity release lender and plan for you, whether you are after the lowest interest rates, the most flexibility, or the highest loan amounts.

We are experts in equity release plans, including home reversions and lifetime mortgages, so we are equipped to inform you of the best and worst interest rates on the equity release market.

If you are concerned about the accumulated interest that defines equity release, speak to us about alternatives to releasing equity, as we know that this scheme isn’t for everyone.

On the other hand, if you are simply worried about the financial side of equity release in general and you aren’t sure whether you can afford it, we would be happy to go through the costs of equity release with you.

Rest assured that low-income earners can use their equity loan to pay for the fees involved with equity release, so you do not have to have savings to afford this scheme.

What’s more, as no repayments are necessary, you can join the scheme regardless of your income, credit rating, or amount of savings.

For general tips on how to survive the 2022 cost of living crisis, see our blog on budgeting suggestions.

If you can get yourself into the best financial position possible before equity release, you will reap the benefits. However, if this is not possible for you, you can still get involved with releasing equity, and you don’t have to worry about owing money while you are still alive.

References

[1] About Us https://www.equityreleasecouncil.com/

[2] Welcome to the Financial Conduct Authority https://www.fca.org.uk/

[3] Improving your credit score https://www.experian.co.uk/consumer/guides/improve-credit-score.html

[4] Improve your credit score – Top tips to boost your creditworthiness https://www.moneysavingexpert.com/loans/credit-rating-credit-score/