Lifetime mortgage rates fall to a record low as the popularity of equity release booms
A 2016 survey by Halifax found that a third of people expect to still have a mortgage in retirement. As the average age of first-time buyers increases - and more people find themselves with a home loan in later life - lending to the retired is a hot topic in the mortgage industry.
Lifetime mortgages are becoming more popular with older clients and now the cheapest lifetime mortgage rate is lower than the average standard variable (SVR) mortgage rate for ordinary mortgages.
Lifetime mortgage rates fall below 4.5% for the first time
Lifetime mortgages are designed to help older borrowers to release cash from their properties. These borrowers, who are typically over the age of 65, don't make any monthly repayments to the mortgage. Instead, the interest charged is added to the loan and the total debt is repaid when the house is sold. This is normally when the borrower dies, moves into a care home, or decides to sell-up and live with family.
Now, the cheapest rate on a lifetime mortgage has fallen below the average variable rate on traditional mortgages. Legal and General has reduced the rate on of its products to just 4.44% - the first time the rate on a lifetime mortgage has fallen below 4.5%.
The rate is only available to wealthier borrowers as it is on the company's 'premier' flexible lifetime mortgage, which previously charged 4.8%. The minimum loan size is £250,000 and there is a fee of £1,999. The lender has estimated that the rate cut would save someone with a £1m loan £87,594 over 15 years.
L&G has also reduced the rate on smaller loans worth more than £10,000 from 4.99% to 4.59%.
While lifetime mortgages are becoming more and more popular, experts have warned borrowers that these loans can become expensive as the interest is compounded. It means that the borrower pays more and more interest as the years go by as the loan gets larger and larger.
For example, L&G say that a £1m loan taken out now with a rate of 4.44% would have almost doubled to £1,918,682 in 15 years.
Over 65s releasing more equity than ever before
The news comes as data reveals that over 65s are releasing more equity from their homes than ever before. The Daily Telegraph has revealed that the amount released between April and June this year was £514m - the highest ever recorded.
Typically, equity release is used for:
- Repaying a traditional mortgage at the end of its term
- Providing money to family members to help them get onto the property ladder
- Avoiding inheritance tax - as long as the homeowner survives more than seven years then the money gifted does not form part of their estate
Steve Ellis from L&G says: “With our first sub-4.5% roll-up lifetime mortgage, we believe we are now offering a product that compares favourably with mainstream SVR mortgages, which will allow customers to make more transparent choices.”