The problem: My client took out a lifetime mortgage 12 years ago and with rates having fallen during that time they are interested in moving to either a cheaper rate or a reversion plan. However, they are concerned whether this is worth it with the early repayment charge plus they would now like to release the maximum amount from their home. What are the options and would the figures stack up?
The solution: It is certainly true to say that the rates on new lifetime mortgage products have come down since the client took out the product. Since that time we have also had the regulation of the entire equity release sector, including home reversion plans, and any decision to rebroke this case should take a complete overview of both sectors.
Looking in detail at the client, we know she is a single female born in 1941 and that back in 2001 her property was valued at £200,000 with the client choosing to take out a lifetime mortgage for £50,000 at a rate of 8 per cent.
Bringing these figures up to date, using a rate of 8 per cent compound interest, the original loan of £50,000 would now leave a figure of £125,909 to be repaid, which does not include any early repayment charge as we are not aware of the ERC terms of her product deal. However, we can surmise that there will be an ERC to pay and this should obviously be taken into account when working out the finer details of the case and the recommendation.
The next stage is to look at the potential value of the client’s property 12 years on. Even taking into account the house price dips following the financial crises, by using the Land Registry website, we can estimate there has been an average increase in property values of approximately 6 per cent each year. Therefore, over a 12-year period it would be fair to say that the current value of the client’s property is in the region of £410,000.
As you state the client now wants to release the maximum amount of equity from their property and with those funds pay off the existing lifetime mortgage and the ERC attached, whilst presumably freeing up the rest of the cash to do with as they wish.
After looking at the option of further funds being available from their current provider, One option would be to rebroke to a cheaper interest rate lifetime mortgage – looking at the options available, given the client wants to release the maximum amount, they could opt for a Aviva product which would release a maximum of £155,896. This provides an additional £29,987 over the £125,909 owed – however we mustn’t forget that the ERC payment must also come out of this amount.
Given this lifetime mortgage product may not offer the sufficient additional funds required, the adviser should also be reviewing the home reversion plans available.
A Bridgewater reversion, for example, could offer the client £176,827 – £50,918 more than the total of the existing lifetime mortgage and over £20,000 more than the maximum on offer from a new lifetime mortgage. Also, if the client wants no further funds, but wanted to ensure an inheritance in the future, then a reversion would guarantee 28.48 per cent for the client to give as their inheritance or it could be utilised in order to release further funds in the future.
As always with all such cases it is absolutely vital the adviser shows that the option recommended is better value for the client taking into account all the criteria and the various costs associated with each option.
Chris Prior is sales and distribution manager at Bridgewater Equity Release