Understanding the value of gilts!!!

Geofforama

Hi all,
I am new to posting on MSE, so here goes!

A family member is in an equity release scheme with aviva and has been for about 10 years. They took the scheme to help them finance early retirement which it achieved.

They have now re-appraised their position and want to buy out of the scheme. They have had a quote to buy out and it is extortionate!

Could anyone provide me with the formula to work out the value of a particular gilt and where to find its daily value, I am lead to believe its in the F.T. And also is there any room for negotiation on the settlement figure?

My family member is prepared to take out alternative finance to escape this scheme.

Any thoughts anyone?

Many thanks

Geoff

jamesd

Why do gilt yields matter? Usually equity release is rolled up interest at some specific rate.

If there is some relationship to gilts, gilt yields are currently at historic low yields meaning historic high prices to buy out of anything linked to gilt yields. So it's horrendously bad timing to be trying to buy out of a gilt-linked arrangement at the moment. It may improve substantially in a few years, after the effect of fiscal easing has worn off. No telling what the exact timing will be. By improve substantially I mean that the current 15 year gilt yield is around 2.75% and the normal sort of rate is 4.5%. If yields and prices returned to those more normal levels the buyout price could easily drop by 40%.

Without knowing why gilt yields matter or which specific ones this looks like an extremely poor time to be buying out of this scheme and the best advice is likely to be to save a small fortune by waiting a few years.

Here's the FT page with gilt yields. 1/yield = price. Use the Data archive link above the table to get to old data and pick the desired category near the bottom; choose Bonds & rates, UK gilts-cash market and pick a date to get what you're after

Geofforama

Hi jamesd,
Thanks for the reply,
I havent got the specifics of how the gilts are tied in but I have been told it is the 4.125 index linked treasury 2030 gilt.
I agree that it seems the wrong time to opt out as they are still issuing gilts at more favourable rates.
Will do some more research as to how gilts are involved,

Thanks again

jamesd

Yes, knowing how they are linked would be good, so you can get some idea of the possible benefits of a delay.

It's also of interest in considering how complicated the product is and whether the person who took it out understood how it worked when they took it out.

xylophone

jamesd wrote: »

Why do gilt yields matter? Usually equity release is rolled up interest at some specific rate.

http://www.compareequityrelease.com/news.html
Points to consider first
"Many equity release schemes charge an early repayment penalty, also known as early exit fees. These charges are, in theory, supposed to protect the lender from losses incurred due to early repayment of the loan. Before you decide to go ahead with an equity release remortgage, it is important to find out whether your existing plan comes with an early repayment charge clause, and whether it is applicable to you. Different lifetime mortgage companies apply different formula for assessing how their penalty is applied. The following list confirms which companies follow each different type of equity release early repayment charge: -

Gilts – Aviva, Just Retirement, Partnership, more2life, Norwich Union
Fixed penalties – LV=, New Life Mortgages, Godiva, Saffron Building Society, Northern Rock, Hodge
Bank of England base rate – Prudential

Swap Rates – Hodge Lifetime"