Equity Release

caveman38

Thank you for all your replies. I understand fully now. 

GDB2222

unforeseen said:

GDB2222 said:

I can’t see why the interest charged on these loans is so much higher than for normal mortgages?

Because you don't have to pay the equity release back until the house is sold. 

I don’t understand the ‘because' in that answer.  Why should the interest rate be higher? 

ReadingTim

GDB2222 said:

unforeseen said:

GDB2222 said:

I can’t see why the interest charged on these loans is so much higher than for normal mortgages?

Because you don't have to pay the equity release back until the house is sold. 

I don’t understand the ‘because' in that answer.  Why should the interest rate be higher? 

Because the repayment date isn't known - it could be in 10 months time, it could be in 10+ years time.  As the lender doesn't know when they're going to get their money back they charge a higher rate of interest than they do for when the repayment date is fixed.  

QrizB

Also, AIUI the interest rate isn't variable. Long-term fixed rate mortgages tend to have higher interest rates.

kingstreet

GDB2222 said:

unforeseen said:

GDB2222 said:

I can’t see why the interest charged on these loans is so much higher than for normal mortgages?

Because you don't have to pay the equity release back until the house is sold. 

I don’t understand the ‘because' in that answer.  Why should the interest rate be higher? 

The swap rates to fund standard fixes are term-related so a lender's treasury team can look at SONIA and figure out for a given period, how to rate a product, calculate the margin, fees, ERCs etc.

On a lifetime interest-roll-up product where there's a no-negative equity guarantee, the cost has to reflect the nature and the increased risk the lender and the funder would perceive. Our latest application submitted last week was 6.19%. It's higher than you would find on a typical term-limited fix today but is lower than pretty much every high street lender's SVR.

GDB2222

kingstreet said:

GDB2222 said:

unforeseen said:

GDB2222 said:

I can’t see why the interest charged on these loans is so much higher than for normal mortgages?

Because you don't have to pay the equity release back until the house is sold. 

I don’t understand the ‘because' in that answer.  Why should the interest rate be higher? 

The swap rates to fund standard fixes are term-related so a lender's treasury team can look at SONIA and figure out for a given period, how to rate a product, calculate the margin, fees, ERCs etc.

On a lifetime interest-roll-up product where there's a no-negative equity guarantee, the cost has to reflect the nature and the increased risk the lender and the funder would perceive. Our latest application submitted last week was 6.19%. It's higher than you would find on a typical term-limited fix today but is lower than pretty much every high street lender's SVR.

That’s a good point. With these ER loans, an individual loan can fall in at any time, but the lenders have a large portfolio and it’s possible to predict with reasonable accuracy how many will fall in each year. That is, after all, the basis of insurance. 

The no negative equity guarantee needs to be paid for, I agree. Still, there’s around a 1.5% margin built into the ER rates, even when the LTV is v low.