Personal Finance

The secret trick that can save retirees thousands


Older homeowners are wasting thousands of pounds on expensive equity release plans instead of using a little-known alternative mortgage.

People in or approaching retirement have typically found it difficult to take out mortgages because of their age, even if they can comfortably afford the repayments.

To help solve this issue, mortgage companies were given permission by the City watchdog, the Financial Conduct Authority (FCA), to offer a new type of loan called retirement interest-only (Rio) in 2018.

New rules removed many of the hurdles that had made it difficult for people to borrow against their home into their 60s, 70s and 80s. It also meant they could avoid equity release plans, which can quickly whittle away the value of a home.

Rio loans are ideal for retired homeowners who have a regular income, whether from part-time work or, more likely, from a pension or annuity. They allow people to stay in their home and release a cash lump sum while retaining the ability to move in future.

But while the benefits are clear, consumers are yet to capitalise. A Freedom of Information request to the FCA by Telegraph Money found that just 984 Rio loans were taken out in 2019 – equivalent to fewer than 20 a week. The slow take-up may be because few mainstream providers offer these deals to customers. Nationwide Building Society is the biggest brand in the market, but no other major high street names have joined it so far.

This has resulted in many people resorting to equity release plans, even though the costs are much higher. Figures from the Equity Release Council, the industry trade body, show that 85,497 plans were active in 2019.

Analysis by Defaqto, the data provider, shows how older homeowners can waste thousands by using equity release when a Rio mortgage would be better suited to their circumstances.

Even though Rio interest rates tend to be higher, the compounded way interest is charged on equity release means debts mount much faster.

For example, a 65-year-old borrowing £50,000 against a £250,000 property would typically be charged an interest rate of 2.8pc when using equity release. After 20 years, their debt would have risen to £87,477 – an effective cost of £37,477.

The same homeowners using a Rio mortgage would expect to pay 3.19pc for the same-size loan, but despite the higher rate, avoiding the compounded equity release interest charges means the loan would have only cost them £31,900 after two decades. This represents a saving of £5,577. For those borrowing greater sums, the savings would be even higher.

Gregor McMeechan of Malleny, a later-life mortgage specialist, said he was concerned that retirees were being pushed into inappropriate equity release plans by advisers who stood to profit. He said: “Equity release specialists have a vested interest in pushing people down their route, as it pays better commission than the other routes.”

Mr McMeechan said he believed this was because few people were aware of Rio mortgages. “I think homeowners are being recommended schemes that aren’t always the best route for them and may cost them more or be less flexible,” he added.

He estimated that as many as 25pc of people taking out an equity release plan would be better served by taking out another form of mortgage, which could be a Rio or a traditional loan.

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However, while the creation of Rio loans has made it easier to borrow into retirement, many homeowners are still blocked from taking out a mortgage because of the strict affordability tests. Even though most are buying with a partner, borrowers must demonstrate that the person with the lowest income could afford the repayments alone, should their partner pass away.

This is not the case with equity release, where customers do not have to undergo affordability checks. Those plans also have the benefit that interest payments do not necessarily need to be made on a monthly basis, although not doing so will make the debt mount quickly.

Interest rates also tend to be fixed for the lifetime of the loan rather than for a set period, as is the case for Rio mortgages.

However, as reported by this newspaper, restrictive equity release plans can force retirees to pay six-figure penalties if they want to make changes to their plan, leaving them effectively trapped in their own home. A Rio customer would have much greater flexibility and face lower charges should they want to move.

Reader Service: Try our free equity release calculator and see how much tax-free cash you could release from your property


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