Martin Lewis gives advice on overpaying on your mortgage
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As living costs rise, many Britons have been exhausting options to free up more cash. While homeowners with mortgages typically look to do this through equity release, today’s economic climate may not make for the best environment to do so, experts have said.
David Ingram, founder of MyLocalMortgage said: “Unfortunately, an increase in broader mortgage rates is typically bad news for those over 55s looking to do equity release.
“There are two key reasons; firstly the rates for lifetime mortgages, the most common form of equity release mortgage, are directly linked to the wider market, so the borrowing rates have been increasing in line with residential mortgage rates.”
Interest rates for these mortgages have increased from around four percent at the beginning of the year to around seven percent now, according to Richard Dana, founder and CEO of family mortgage broker Tembo.
Mr Ingram said: “This means that a borrower taking out a lifetime mortgage in the current market will be paying a much higher interest rate than they would have done over the last few years.
“This has a particularly costly effect on lifetime mortgages, as the interest rates continue to accrue and compound until death (or the last borrower moves into long-term care), meaning the final repayment amount due can be disproportionately large compared to the original amount borrowed.”
Mr Ingram continued: “The second key issue is the forecasted impact that rising interest rates will have on property prices, with major banks estimating a correction of seven percent to 10 percent over the next two years.
“The two major equity release methods; lifetime mortgages and home reversion schemes, rely on a valuation of the property. For borrowers looking to release equity from their home based on a higher expected property valuation may be disappointed if this price correction happens and their property is assessed to be of a lower value.”
However, some may still find it a good option to explore, but there are a few key considerations people can take when assessing the deal.
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Only borrow what’s needed
Philip Stubbins, managing director at Money Expert said: “If you decide that Equity Release is the right option for you, consider how much you actually want to withdraw from your property.
“Ask yourself whether you really need to unlock all of the equity built up in your property, as doing so will incur higher interest charges when the time comes to repay the loan.
“Taking out smaller amounts or borrowing gradually could make equity release less expensive in the long run.”
Consider alternative options to unlock funds
Today’s high interest rates are increasing repayments on equity release loans and lenders are making it harder to find a good deal while products are increasingly withdrawn from the market.
Mr Stubbins said: “With this in mind, it’s worth thinking about other options that are available to you that could free up funds.
“If you’re considering equity release for home improvements, it’s worth weighing up whether a bank loan or a home improvement loan could be a better option that’s cheaper in the long term.
“Interest rates are rising across the board, however, a loan may be the better option and allows you to keep the equity in your home without incurring huge costs.”
Mr Stubbins continued: “Another option could be carefully considering whether to downsize to a smaller home that fits your needs better. Naturally, moving to a cheaper property will allow you to unlock more funds that can be used how you see fit.”
Obtain expert advice
Equity release is a complex product with risks attached for the customer, making it crucial to seek impartial, expert advice from a qualified financial adviser.
Mr Stubbins said: “[A financial advisor] will be able to provide you with all the information you need on whether it’s the right route for you to unlock the funds you need, or if there are alternative products out there that suit your needs much better.
“Make sure that any products are provided by firms regulated by the Financial Conduct Authority (FCA).”
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