Elderly homeowners who have taken out an equity release plan in recent years could save their heirs tens of thousands of pounds by switching to a cheaper deal.
They are being urged to act sooner rather than later – before the Bank of England starts to push up interest rates and new plans become more expensive.
Equity release plans allow older homeowners to extract cash from the equity stored up in their home. They usually take the form of an interest-only loan, but in most instances borrowers do not pay the interest payments every month. Instead, they are rolled up into the loan. The interest rate is fixed from outset.
Happy holidays: MoS readers John and Christine Stevens paid for a string of cruises using equity release loans
Hundreds of homeowners have already saved huge sums of money by switching to a lower-rate loan, following the launch of Age Partnership's switching service in spring this year.
At the time, Age Partnership, the country's largest equity release broker, pledged to try to help everyone with an equity release mortgage switch to a lower rate.
More than 2,000 people contacted the company to find out if they could save money. It says those who have successfully switched have saved an average of £86,560 in interest costs – based on an average life expectancy of 14 more years. The total predicted savings made by everyone who has switched plans through the broker so far is in excess of £1,817,000.
Steve Auckland, Age Partnership chief executive, says: 'When we launched, we were overwhelmed with the response. It highlighted the lack of awareness about the ability to switch plans.'
Of those who have successfully switched, the average interest rate of their original loan was 6.4 per cent – with the average new rate being 3.3 per cent.
John Stevens, 84, who lives with wife Christine in Burnham-on-Crouch in Essex, had taken out four equity release mortgages totalling more than £120,000 over the past 20 years.
'We spent the money mainly on cruises, more than a dozen of them,' says John. With interest rates ranging from 5.9 per cent to 7.2 per cent, John had resigned himself to watching the loans rapidly gathering interest and growing in size. After speaking to Age Partnership, he has now switched all four loans into one loan at a rate of 3.4 per cent, potentially saving him £45,000 over the next ten years.
'I should have done it sooner, but I didn't know I could,' confesses John. 'It feels much better moving to a lower interest rate and our two sons will be much better off when we die. There will be more of the home's value left for them.'
With an equity release plan the loan is repaid if you die or go into long-term care. This is through the sale of the home. Nearly all plans guarantee the debt cannot exceed the value of the home. With John and Christine's house, bought for £12,750 in 1973, now worth £320,000, John is aware his sons would be even better off without the loans. But he has no regrets. 'We had some great holidays,' he says.
Former insurance broker Tony Lee, 79, was another MoS reader who was able to switch his equity release mortgage – from 6.6 per cent fixed to just 2.9 per cent, potentially saving £90,000 over the next 15 years. 'I'm so glad I did it and it was no hassle,' he says. 'I had found it alarming that I was paying such a high interest rate when my provider Aviva was offering plans to new customers at much lower rates.
'I asked them to reduce my rate, but they didn't want to know, so I'm now with Scottish Widows and on a much lower fixed rate.'
Carole Smith from Wanstead, East London, was able to move her original equity release plan – taken out to pay off an interest-only mortgage – so that the interest rate was reduced from 5.7 per cent to 2.5 per cent.
'I had no idea I could switch mortgages,' she says. 'I only took out an equity release plan to stay in my home. Even with the early repayment charge I have had to pay to get rid of the original plan, the difference in interest rates has made it worthwhile.'
Not everyone has been able to switch. Barry Jones, 74, from Sidcup, Kent, has taken out four equity release loans totalling £104,000 to pay for home improvements, holidays and bills. He admits: 'With hindsight it was far too easy to obtain this extra capital.'
The loans, which have fixed interest rates of between 4.7 and 6 per cent, have now escalated to £140,000. But the stumbling block was early repayment penalties of just under £25,000.
Barry says: 'We could get a lower loan rate, but we would have had to pay the £25,000 early repayment charge. This meant it would have taken around eight years before we were in a better position as a result of switching. Left between a rock and a hard place, we decided to sell our home and downsize to clear the outstanding loans.'
Age Partnership was unable to help 14 per cent of those who wanted to switch. Early repayment charges were often the biggest obstacle.
Auckland says: 'Switching will not suit everyone. But I would encourage everyone to come forward and have a free review so that they are fully aware of their options. There's never been a better time to switch.'
To get your free guide to equity release fill in the form below, go to www.thisismoney.co.uk/equity-release-guide, or call 0844 571 0968.