Borrowers who release equity accumulate more cash to pay interest over their lifetime

Borrowers who released their equity piled up more cash in voluntary payments on their loans last year, in an attempt to reduce the interest owed and leave more money for family and friends.

New data from industry body Equity Release Council shows the typical rebate rose by 30 per cent or £159 in one year, from £538 to £697.

The total value of refunds also increased by 18 per cent, from £102 million to £120 million.

Their research also showed how making a monthly payment of £100 could save a typical borrower £50,000 in interest over the life of their loan.

Does equity release allow for monthly payments?

Borrowers who obtain equity release usually do not have to make any repayments if they do not wish to.

However, all plans that meet the Equity Release Council’s standards must allow voluntary redemptions.

Most lenders limit this amount to between 8 and 15 percent of the loan amount each year. Borrowers can choose when and how much to repay; some choose to make monthly contributions and others add funds based on their means.

The main benefit of doing so is that it limits the amount of interest that must be paid after the borrower’s death, giving their loved ones the opportunity to keep more of the house after their passing.

Equity release allows homeowners aged 55 or over to access the equity in their homes, and the loan only needs to be repaid from their estate once they die or enter a long-term care facility.

Often, this means the house is sold to pay off the loan.

Many equity release schemes only allow the owner to borrow up to 50 per cent of the value of their property, so there may be money left over after the property is sold, and this could be increased by voluntary payments.

There may also be enough equity in the property for your family to purchase the remainder using a mortgage or their own cash.

However, interest on equity release loans accrues over the life of the loan, so for those who have the loan for a long time and do not make payments, the loan can accumulate large amounts.

Plans approved by the Wealth Release Council have a no negative equity guarantee, meaning that the amount to be repaid cannot exceed the value of the home and there will be no extra amount that your family members will have to pay.

Although more money is being paid back through equity release loans, data suggests only those with surplus cash available in retirement are able to do so, and the data suggests their numbers may have fallen.

The number of refunds issued decreased by 9 percent during 2023 to 172,711, compared to 190,377 the previous year.

However, this could also mean that fewer refunds were being made per person.

I pay £300 a month to keep the interest at bay.

Action Plan: Andy Payne was initially concerned about releasing equity, and opted to make monthly payments to keep the debt from ballooning.

Andy Payne, 62, is an NHS drama practitioner and lives in Portishead, Somerset.

Last year, she applied for an equity release loan to pay off her interest-only mortgage.

He had not been able to pay it back before, having to cut back his hours 18 years ago when his wife died and he became a single father to his daughter, Beth, now 25.

“Beth had just lost her mother, so I was determined that I wouldn’t miss work,” he said. “I wasn’t going to pay for someone else to look after my daughter after everything she’d been through.”

She had hoped to take a lump sum from her NHS pension to pay off the mortgage before she retired, but was left with a £40,000 shortfall.

“I had several sleepless nights. I was very worried about it. I didn’t want to move or downsize,” Payne said.

After discussing it with her daughter, who she says has a “great career” and can “take care of herself” financially, she decided to consider equity release.

“It’s fair to say I was quite apprehensive about the release of capital. I didn’t know the details and it took a lot of convincing,” he said.

‘I remember when I signed the contract thinking, ‘This rate isn’t very good,’ but it wasn’t much different than a traditional mortgage; now the rates are higher.’

Mr Payne decided to take out the £40,000 loan at a rate of 6.63 per cent, but as he still works three days a week he opted to make voluntary monthly repayments.

This should allow you to pay the interest on the loan as well as a portion of the loan.

“I have chosen to pay the maximum amount, which is £333 a month. The interest is not that high, but I can choose to stop paying, which is important,” she says.

The Capital Release Council said the high cost of living had hampered customers’ ability to make regular repayments, but customers were still keen to reduce their borrowing where possible.

Jim Boyd, chief executive of the Equity Release Council, said: ‘While equity release helps people maximise their money in later life, without the need to make ongoing repayments, people are making significant savings by gradually reducing their borrowing when they can afford to.

‘Small payment habits add up to significant savings over time. Voluntary payments allow clients to access their property assets now and increase the chances of keeping something to leave as a traditional inheritance.’

When and how: Most equity release clients are not tied to a repayment schedule and are free to contribute money when they can afford to.

How £100 a month could save you £50,000

The Council’s analysis shows how a typical equity release customer, who draws down £60,000 on their home through a drawdown lifetime mortgage, could reduce their borrowing costs by making regular repayments.

He said making regular monthly payments of £100 would save them almost £17,000 over a decade in total borrowing costs, and almost £50,000 over 20 years.

These savings increase to almost £34,000 and £99,000 with a regular monthly payment of £200.

Another alternative would be to make a one-time payment of £700 each year, which would save almost £10,000 over 10 years and almost £30,000 over 20 years. If this one-time payment were doubled annually to £1,400, the saving would rise to more than £20,000 and almost £60,000.

The vast majority of equity release plans do not require monthly payments. However, equity release lenders have launched products known as “lifetime mortgages with repayment terms”, where interest is due for payment over a set number of years.

These are aimed at younger, Gen X homeowners, and may be required to make payments until they stop working, for example.

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