News
Mind the gap!
David Black, Banking Specialist, Defaqto
The gap between interest rates charged by lifetime mortgages and long term fixed rate residential mortgages has widened considerably over the last two years. It is worth pointing out however, that the ‘no negative equity guarantee’ is responsible for an additional cost to equity release providers of around 0.7% per annum.
A number of providers have exited the market over the past couple of years citing either funding constraints or more profitable opportunities in alternative product areas. Equity release has long been thought of as a sleeping giant but, given the perilous state of many pensions, it can only be a matter of time before the two types of equity release schemes - lifetime mortgages and home reversions - become a more integral part of your retirement planning.
However, increased competition in market should result in a narrowing of the interest rate gap between lifetime mortgages and long term fixed rate residential mortgages.
The following table compares the average fixed rate charged by long term fixed rate residential mortgages and interest roll-up fixed rate lifetime mortgages over the last few years:
| Date | Average fixed interest rate charged by interest-roll up lifetime mortgages | Average interest rate charged by residential mortgage with fixed rates of 10 years or longer | Differential |
| August 2010 | 7.17% | 5.72% | 1.45% |
| August 2009 | 6.94% | 6.21% | 0.73% |
| August 2008 | 6.88% | 6.57% | 0.31% |
| August 2007 | 7.06% | 6.43% | 0.63% |
