In his latest Q&A, Mark Gregory is helping a family looking for clarity over the impact of compounding on equity release. Here he runs through how it works and how it will affect the amount owed over time
The Question
My parents split when I was young and, long story short, I no longer see my Dad regularly. I heard through my sister he has released equity from his property – around £50k – and I think the house is worth in the region of £455k.
I am not sure if it’s a new type of equity release plan or the old school home reversion. Either way, he took the policy out in 2013.
My question is this – how much interest will he have accrued and does compounding effect the final repayment? He told my sister it’s a fixed rate and therefore compounding is irrelevant. But I’m not so sure. I want to make sure he’s not going to be left without any money if needs to sell up to move to a smaller home or to go into care.
Mark’s Answer
Thank you for your enquiry. I would like to give you a precise answer, but without knowing exactly which plan your dad has, it is difficult to confirm how much he currently owes or how much equity he may have available if he decides to move home or enter care.
The first step is to establish exactly what type of plan your dad took out in 2013. Your sister has mentioned that it has a fixed rate of interest, which would suggest it is most likely a Lifetime Mortgage. It is less likely to be a Home Reversion Plan if interest is being discussed, because with a Home Reversion Plan the customer sells a share of the property rather than borrowing money on which interest is charged.
The best place to confirm this is your dad’s latest annual statement, which should show the provider, plan type, interest rate and current balance.
Does a fixed rate mean compounding is irrelevant?
No – and this is an important point. A fixed rate simply means the interest rate itself stays the same for the term of the plan. It does not mean the balance cannot grow.
If your dad has a Lifetime Mortgage and has not made payments, interest will be added to the loan. Future interest is then charged on both the original loan and the interest already added. That is compounding, and it can significantly increase the amount owed over time.
For example, a £50,000 Lifetime Mortgage taken in 2013 could now be much higher if no interest has been paid, depending on the fixed rate. The only way to know the exact current balance is to check the annual statement or request a redemption figure from the provider.
If it is a Lifetime Mortgage
- Your dad remains the legal owner of his home
- The loan is secured against the property
- Interest is charged at a fixed rate
- If no payments are made, the interest rolls up and compounds over time
- Some plans allow voluntary payments, including full, partial or ad hoc interest payments, although I cannot confirm whether your dad’s 2013 plan includes this feature
- The loan is usually repaid when the property is sold, either after death, moving into long-term care, or if he chooses to sell and downsize
If your dad’s property is worth around £455,000, then the outstanding balance would need to be compared against the current property value to understand how much equity remains.
A Lifetime Mortgage should also include important protections, such as the No Negative Equity Guarantee, meaning the estate should never owe more than the value of the property when it is sold, provided it is sold for the best price reasonably obtainable.
What should you do next?
Equity release providers usually send annual statements, so your dad should have access to details showing the current balance, interest rate and product type.
If your dad is willing, ask him to share the latest statement or contact the provider for a current balance and redemption figure. With his permission, one of our expert advisers may then be able to help you understand what the figures mean and what options he may have if he wants to move, downsize or plan for future care.
Our equity release advisers can be contacted on 0800 802 1051.
Meet our expert…
Mark Gregory, founder and CEO of Equity Release Supermarket, is here to answer your questions. Mark is an adviser himself with over 20 years equity release experience.
He launched Equity Release Supermarket 10 years ago and it has grown to become one of the UK’s leading equity release specialists.
Email kate.saines@emap.com to ask Mark a question
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