Over50choices has calculated that of the £699 million borrowed in equity release in Q1 2023, over £1.06 billion could be paid out by consumers in compound interest over a 15-year period, assuming average rates of 6.2%.
However, if consumers made voluntary penalty-free partial repayments, Over50choices said it could significantly reduce the amount of interest they pay. For example, the average sum repaid per plan in 2022 was £1,133. Over a 15-year period that one repayment on a typical new lifetime mortgage of £102,405 would save a consumer £1,732 in interest and the same payment made annually over 15 years could save £11,884.
Over50choices has launched a new-to-market calculator to help consumers understand the impact compound interest will have on a lifetime mortgage and to support them with their later life financial planning.
The later life planning company’s ‘Boomer Barometer’ study has also found that just one in five (22%) of over-55s are aware that they can make early repayments on equity release, while a further 65% do not know if they can or not. Furthermore, just 16% are aware that the interest payable on an equity release lifetime mortgage is compounded, while 70% do not know.
According to the Equity Release Council, the number of voluntary penalty-free partial repayments made by equity release customers grew by 48% last year. More than 90,000 equity release customers reduced their loans by £102m in 2022 by making 190,374 partial repayments throughout the year.
Making voluntary penalty-free part repayments was made a compulsory feature for all products that meet Equity Release Council standards from 28 March 2022, to allow consumers to choose to make repayments while they are still alive, reduce the interest costs and preserve more of their property value.
Ashley Shepherd, founder and managing director at Over50choices, said: “Despite its popularity in recent years and the reforms that have been made for the good of the consumer, equity release is a market that is still not fully understood by its target market. While every product that meets Equity Release Council standards now allows people to make loan repayments to ease the build-up of interest, only one in five (22%) of over-55s in our research understand this, while a further 65% do not know if they can or not.
“Making voluntary penalty-free partial repayments will help to reduce the interest burden over time, particularly when you consider the interest rolls up. Again, our research shows that consumers are not all fully aware how interest is calculated on equity release products, which is why we’ve launched a new and simple calculator to help them either when considering a new plan or when they have an existing plan and want to calculate how much they can save by making a repayment.
“Making the decision to take out equity release should not be taken lightly and not without fully understanding both the pros and the cons, which is why educating and empowering consumers is so crucial.”
