The analysis was undertaken by Trevor Horne, fellow at the Institute of Actuaries, who created a bespoke calculator.
That itself seemed a little odd given that there has been a repeated call for more technology to be used in the later life lending market and a tool – if created – seems to have the potential to provide significant consumer benefit
Modelling wise, I ran financials on both 15 and 30-years terms and used a variety of loan amounts as well as monthly contributions. The impact metric was the balance at the end of the term after a range of monthly payments were made.
Balance after 15 years at six per cent interest
| Loan amount | |||||
| Payment amount | £30,000 | £60,000 | £100,000 | £150,000 | |
| £0 | £71,896 | £143,793 | £239,655 | £359,483 | |
| £10 | £69,027 | £140,924 | £236,786 | £356,614 | |
| £50 | £57,551 | £129,447 | £225,310 | £345,138 | |
| £100 | £43,205 | £115,102 | £210,964 | £330,792 | |
| £200 | £86,411 | £182,273 | £302,101 | ||
Balance after 30 years at six per cent interest
| Loan amount | |||||
| Payment amount | £30,000 | £60,000 | £100,000 | £150,000 | |
| £0 | £172,304 | £344,609 | £574,349 | £861,523 | |
| £10 | £162,559 | £334,864 | £564,603 | £851,778 | |
| £50 | £123,579 | £295,883 | £525,623 | £812,798 | |
| £100 | £74,853 | £247,158 | £476,897 | £764,072 | |
| £200 | £149,706 | £379,446 | £666,621 | ||
As you can see on a £30,000 mortgage over a 15-year term at a rate of six per cent, a £10 a month contribution reduces the balance outstanding at the end of the term by just under £3,000.
If that term (life expectancy) extends to 30 years, then that same £10 a month reduces the end of term balance by circa £10,000.
If no payments are made the £30,000 becomes £71,896 after 15 years and £172,304 after 30.
If the borrowing increase to £150,000 – still at six per cent – and the payments to £200, then the balance at the end of the term reduces by £60,000 if the customer survives for 15 years and by circa £200,000 if they survive for 30.
If no payments are made the £150,000 at the end of 15 years becomes £359,483 and after 30 years, £861,523.
Clearly, it will be for individual firms to decide if they think affordability assessments should be completed on all equity release cases. And of course, even if affordability is assessed, the borrower can still decide not to make payments.
However, if cases have completed without payments being recommended and/or affordability properly assessed then the defence in later years as to why no payment was recommended might be a difficult one given the obvious financial advantage of making them – the consumer is paying for advice after all.
