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New equity release products limit interest roll-up
A new breed of “hybrid” equity release products are coming on the market that allow the borrower to limit the level of debt that accrues over time because of interest roll-up.
Standard equity release mortgages (sometimes referred to as lifetime mortgages) are charged at an interest rate of 5.5-6.0% which is “rolled up” over the lifetime of the loan. This can double the amount owed over a 10 year period.
The new “hybrid” products allow the borrower to pay all or part of the interest for a chosen period and significantly reduce the effect of the usual roll-up of interest.
The interest rate being charged is typically 4.5%, an additional useful saving over a more conventional product.
Equity release products have proved popular with older homeowners as they allow them to release capital from their increasingly valuable property and supplement their income or allow for expenditure on home improvements.
We have also seen homeowners releasing money for other purposes, such as holidays, a new car or even assisting their children with the deposit needed to purchase their first home.
The new hybrid equity release products are likely to attract people who have maturing interest-only mortgages with no specific repayment vehicle. In these cases, the existing lender is likely to want its money back, while the homeowner is not in a position to sell their home to raise the capital.
As monthly payments are involved, lenders need to underwrite such applications responsibly and so will ask for details of all income sources and committed expenditure to ensure that any loans granted are affordable, both now and in the future.
However, if the borrower’s circumstances do alter and their income reduces, it may still be possible to revert the mortgage on to a full roll-up basis.
If you are thinking of releasing equity from your property, be sure to speak to one of our advisers first. We’ll make sure you get all the facts you need to make a proper considered decision.