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Younger equity release borrowers expected but warning raised over interest roll up

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  • 07/01/2020
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Younger equity release borrowers expected but warning raised over interest roll up
Equity release advisers expect to deal with younger clients this year, as the need to pass on an inheritance to children sooner and the expiration of interest-only mortgages drives down the age of the borrowers.

 

A survey by equity release provider Canada Life revealed that this year almost 40 per cent of advisers said they expected their clients to be younger this year.

The average age of new equity release customers was 70 years old for new drawdown plans and 68 years old for new lump sum plans, in the first half of 2019, according to the Equity Release Council’s autumn report. Advisers responded by saying they expected these average ages to reduce in 2020.

Alice Watson, head of insurance marketing at Canada Life, said rising house prices mean retirees want to help children and grandchildren get on the property ladder. Releasing equity from their property allows them to do this while staying in their home.

She added: “The fact that clients are expected to be younger next year is likely linked to over 55s looking to help family by giving an early inheritance.”

But experts warn that taking out an equity release mortgage too early could mean you pay more than double the debt back from your estate when you die or when you move into long-term care. This is based on rolling up the interest onto the debt rather than paying the interest monthly.

The doubling effect and the rise of younger equity release borrowers has been raised as a concern by the Financial Conduct Authority.

According to analysis by Andy Wilson Financial Services for Mortgage Solutions, based on a typical interest rate of 3.5 per cent, a mortgage debt will double in just under 20 years.

If a borrower chooses to take the maximum loan available, the interest rate is likely to be nearer six per cent which means the mortgage debt could double in 11-and-a-half years. For a 55-year-old borrowing £100,000 and rolling it up, by the time they are 90 the debt could have reached over £800,000.

Andy Wilson, director of Andy Wilson Financial Services, said “I agree we will see a downward shift in the average age of applicants, but I think the main shift will be down to more people refinancing normal interest-only mortgages that have come to the end of their term.

“Borrowers find themselves needing to sort the loans out or risk losing the home. It is estimated that some 40,000 interest-only mortgages will mature each year until 2032, and many holders will be at or approaching retirement age and so will turn to equity release to pay them off.

“As the minimum lifetime mortgage age is 55, this will mean more refinancing for these younger borrows in the 55 to 70 age bracket.”

Wilson said those considering lifetime mortgages need to be made aware of the dangers of interest rolling-up on the debts.

Watson said strong consumer safeguards and the requirement for face to face independent legal advice ensured equity release borrowers received the information they needed.

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