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Low Inflation Affects Equity-Release Mortgages

by Jim ONeil on October 29, 2011

in Mortgages

The low UK interest rates are great for people needing cheap loans. However, the 0.5 percent base rate can be detrimental to holders of an equity-release home loan, which involves borrowing against the security in their property. Early repayment penalties are not widely publicized and they can be quite hefty. Equity-release loan holders should be aware of early repayment consequences.

People pay off equity-release loans for many reasons, including the desire to downsize. Penalties for early repayment can range from five to a whopping 25 percent of the amount borrowed. The fee is imposed because with these loans, APR is fixed. Rates are currently between six and seven percent and early repayment will leave lenders in a pickle.

Since lenders are unlikely to receive the same return on safe investments like gilts, they impose a substantial early repayment penalty. Though the situation is bad for those who want to repay early, it is much better for people interested in taking out an equity-release loan. Since gilt yields and interest rates should be higher in the future, the early repayment penalty should be little or nothing.

The equity-release loans cheapest for most people will likely be gilt-linked. According to Dean Mirfin with specialist equity-release broker Key Retirement Solutions, penalties of most annuity-backed programs are linked to gilt yields. These are not recommended for consumers who know they will be repaying the loan early. A better deal is a straight fix-rate mortgage that features a flat and decreasing penalty running for five or ten years.

There is a tradeoff for flexibility and options with these loans, says Mr. Mirfin. Programs featuring gilt-linked penalties usually have rates 0.25 to 0.5 percent lower than fixed-rate penalty programs. For people borrowing for the long-term, lower loans APR is more important, making now a great time to take an equity-release loan.

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