The equity release market opens up

A more competitive market means retirees with equity release mortgages could save by switching provider

For cash-poor retirees who own their own home, equity-release plans have long offered a means to gain capital later in life. And with more people now taking out such plans, the market is increasingly competitive.

As a result, if you took out an equity-release plan a few years ago, you may now be able to switch to a much better deal.

Equity-release plans enable older homeowners to unlock some of the value tied up in their properties while staying in the home. The money advanced is repaid, with interest, from the proceeds of the sale of the house when they die or move into long-term care.

Traditionally, providers have charged expensive rates compared with standard mortgage deals.

Moreover, with interest accumulating over the lifetime of the loan, the final repayment cost can be very high. Most providers offer a no-negative-equity guarantee, so the sale of the property will always cover what is owed, but there may be little left over.

The lower the interest rate you pay, the less chance there is of that happening. The good news is that rates have come down as the market has grown: the number of products available went from 58 in 2016 to 139 in 2018, according to the Equity Release Council, a trade body. And while the average loan now costs 5.22% a year, down from 5.96%, the most competitive products cost less than 3.5%.

When it pays to switch

For those who took out equity-release plans at a time when rates were less competitive, the potential savings from switching are therefore compelling.

If you currently owe £100,000 and you are paying a pretty typical interest rate of 6% a year, the debt will have grown to around £182,000 in 10 years' time; if you can move to a rate of, say, 3.5%, your debt in 10 years' time would be only £142,000.

Unfortunately, for most people, the calculation will not be quite so straightforward. Note that the Financial Conduct Authority, the City regulator, requires equity-release customers to take independent financial advice before signing up for any new product. This is likely to cost you between 1.5% and 2% of the transaction value. Finally, there is a very good chance your existing equity-release plan has early repayment charges, which you'll need to take into account.

Still, even assuming additional costs of £5,000 in the above example, covering the price of advice and exit fees, it would be less than three years before your switch paid off. It's worth thinking about.

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