Pensioners could save £300million by switching equity release plans

03 February 2009 / by Rachel Mason

Retired homeowners who have an equity release scheme in place could save up to £300million by switching to a different deal, according to the Mail Online.

The site claims that interest rates on equity release mortgages have fallen from about eight per cent to six per cent in the past five years, but that existing borrowers have not benefited.

This is because equity release mortgage rates are fixed for life, so even if rates come down, it won't affect someone with an existing equity release policy.

However, most providers allow borrowers to switch deals, and the Mail Online estimates that around 10,000 pensioners could save up to £30,000 in interest payments over the 15 years by opting for a cheaper deal.

The site claims that customers who have loans with the longest established equity release lenders, for example, Northern Rock, Prudential and Mortgage Express, could gain from switching.

Ordinarily, interest is paid monthly on a mortgage, but with an equity release mortgage, the inertest is added to the outstanding loan and paid off when the customer dies or moves into a home - the lender takes a percentage of the sale of the property. This compound interest means that a cheaper rate is more beneficial the longer the term on the loan.

The example the Mail Online gives is someone with £50,000 outstanding on a loan from Northern Rock at the bank's 2004 rate of 7.99 per cent.

If the loan is left where it is, the sum outstanding, including rolled-up interest, would grow to £73,432 after five years, £107,846 after 10 years and £158,388 after 15 years.

However, if the borrower switches deals to Stonehaven equity release at 6.08 per cent , even adding the £3,000 of costs to switch, the sum owed after five years is £71,205, after 10 years is £95,663 and after 15 years is £128,523 – a saving of almost £30,000.

Dean Mirfin, business development director of specialist adviser Key Retirement Solutions, told the Mail Online: "Just looking at our customers, there are about 2,000 who might benefit from such a remortgage.

"Based on our market share, there are some 10,000 people nationwide who could get a better equity release deal."

Find out more about equity release and speak to a specialist about switching equity release deals.

© Fair Investment Company Ltd