Reducing Borrowing Costs with New Equity Release Rule

April 1, 2022 by Luke Hosea

Homeowners, who have taken advantage of equity release finance, are now able to make additional partial payments without any charges or penalisations, in a bid to reduce borrowing costs.

Although this is a feature already offered with some later life lending products, as of the 28^th March, the Equity Release Council have announced that it will be mandatory for lenders to include this feature with all equity release finance products.

The ability to make extra payments will result in homeowners reducing the impact of compound interest later down the line and decrease the overall cost of equity release.

Equity Release finance is way of releasing the tied up cash in your home. It allows for borrowing against the equity in your house without being required to make any repayments. The loan is repaid when the borrower either moves into residential care or passes away. To be eligible for equity release you must be over 55 years old.

This new rule will allow the homeowner to make payments as and when they wish, thereby reducing the amount that the lender will be repaid when the time comes.

The Equity Release Council, who announced the news regarding the new product safeguard on Monday, stated that over the next decade, a total of £39 million in combined savings can be achieved, with further figures predicted to be a whopping £99 million in expected savings over the next twenty years.

Data shows that, in 2021, more than 125K part payments towards equity release plans were made, without penalty.

Jim Boyd, CEO of the Equity Release Council, said: “The right to remain in your home for life, with no requirement to make ongoing repayments and no threat of repossession, has been central to the appeal of equity release since 1991 and remains a core pillar of the modern market.

“Our new product standard adds to this by ensuring people have the freedom to reduce their borrowing if circumstances change.

“It enables equity release customers to mitigate the effects of compound interest and reduce their borrowing costs in later life, which we know is often one of their main concerns.”

This latest product standard, released and enforced by the Equity Release Council, sets out the following parameters:

• It gives the homeowner the right to live in the property for the rest of their lives – they will also have no obligation to make any payments until they go into full time care or pass away
• Interest rate is capped or fixed for life – the rate of interest will never change even when base rates change
• No negative equity guarantee – the debt will never be more that the home is valued at, meaning that relatives will not be burdened with any funds owing to the lender
• The right to move the loan – providing it meets the criteria, the loan can be moved to a different property

Jim Boyd added: “Equity release today is a flexible financial planning tool for a range of scenarios, from gifting to family to supporting better living standards over longer lives in retirement.

“Consumers should always use a Council member to explore their options and alternatives to equity release, to benefit from product protections and expert advice to decide if it is right for them.”