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How making repayments can help your clients manage their total cost of borrowing

In today’s equity release market, the option for your clients to make ad-hoc or regular repayments is one which may help them save thousands in equity over the lifetime of their borrowing.

Many customers are, of course, looking to use equity release to help remove the burden of increasing monthly mortgage costs, or the repayments required on unsecured debt, such as credit cards.

However, even repaying £100 a month towards a lifetime mortgage can go a long way to improving a customer’s beneficiaries inheritance potential in the long-term, and a detailed discussion on the benefits of this approach with clients is essential.


Why is it important for your client to consider making repayments?


One of equity release’s unique selling points is the ability for your clients to release tax-free cash from their homes without having to make regular repayments.

But in today’s rate environment, it’s arguably more important than ever for clients to fully understand the impact compound interest will have on their agreement, and what options they have to help mitigate it.

According to Key Group’s market monitor data, the average equity release interest rate in Q2 2023 was 6.30%. That’s more than double what it was in Q2 2021, according to Key’s market monitor figures.1

In financial terms for your clients, using the rule of 72, this rise in interest rates means it now takes a little over 11 years for their equity release debt to double when they choose not to make repayments. 

If they’d taken out their plan a year ago, it would’ve taken almost 24 years for that to be the case.

So while equity release can be a great way to help clients significantly reduce their monthly outgoings, in today’s market, it’s now more important than ever to talk to them about the benefits of making repayments where they can, rather than allowing the compound interest to grow untouched.


How much could your clients save by making repayments?


It can be challenging to recommend making repayments during the advice process if a client is looking to equity release as a way to help cut their monthly expenditure.

However, even a small contribution can go a long way. And depending on their current circumstances, they still may be able to significantly reduce their outgoings while helping manage their total cost of borrowing.


Case study example: How David and Gillian Wilkinson could save more than £52,600 on their lifetime mortgage


Having recently retired, Mr and Mrs Wilkinson are looking for a way to help boost their finances. Due to recent price rises, David and Gillian now find themselves cash-poor but asset rich, and they wish to explore whether their property’s value could help them meet their retirement needs. After speaking with their equity release adviser, Mr and Mrs Wilkinson decide they want to help reduce their total cost of borrowing so they can still leave a sizeable inheritance for their children; Kevin and Annabel.

David and Gillian wish to release £133,000 from their property. Their adviser uses Standard Life Home Finance’s Voluntary Repayment Calculator to find the best solution for their circumstances.
 
Release amount    £133,000
 
Property value today        Property value after 15 years with 1% annual HPI 
 
Monthly repayment amount  Total cost of repayments   Total cost of borrowing  Remaining equity   Difference in remaining equity after repayments Monthly saving with repayments  Total compound interest saving by making repayment
£540,000   £626,923   £0
£100
£250
£400
£0
£18,000
£45,000
£72,000
£346,904
£315,732
£268,975
£222,217  
£280,019
£311,191
£357,948
£404,706
£0
£31,172
£77,930
£124,687 
£0
£73
£183
£293
£0
£13,172
£32,930
£52,687

(Calculations based on Standard Life Home Finance’s Horizon 550 lifetime mortgage rate of 6.60% MER – correct as of 03/04/23 – with an annual HPI of 1% over 15 years)

Mr and Mrs Wilkinson learn that without making any repayments, their debt will increase to £346,904 after 15 years; leaving just over £280,000, based on an annual HPI of 1%, to pass on as remaining equity when their lifetime mortgage is settled typically upon death or entry into long-term care.

However, by repaying £400 a month across the estimated 15 year term, David and Gillian can give their finances a boost and still pass on more than £400,000 in property wealth when their plan ends. And by making repayments, they can save over £52,600 in interest charges – a monthly saving of almost £300. Some clients’ budgets may not stretch that far, however. So what if Mr and Mrs Wilkinson were to make lower regular repayments – would their beneficiaries still experience the benefit in regards to the remaining equity left in their home?


Can making smaller repayments still help?


By repaying £250 a month, David and Gillian can make a net saving of almost £33,000 in interest compared to if they made no repayments whatsoever. It would also leave them with more than £357,000 of remaining equity to pass on.

And even by repaying £100 a month, the retired couple can make a net saving of over £13,000 versus if they chose not to make repayments – leaving more than £311,000 to pass on as an inheritance after 15 years.

Picture1.png
 
Release amount £108,000
 
Monthly repayments Owed after 15 years Net saving
£0 £289,865.98 £0
£100 £259,248.91 £30,617.07
£250 £213,323.06 £76,542.92
£400 £167,373.31 £122,492.67
  

Voluntary Repayment Calculator


By using Standard Life Home Finance’s Voluntary Repayment Calculator, you can clearly show your clients the impact of making repayments and how this can be a benefit in the long run.

Within it, you also have the option to set specific, even multiple, repayment periods and repayment amounts – ensuring their results are personalised to their circumstances – plus the ability to programme in future drawdowns to give a highly accurate picture of how they can help reduce their overall debt accrual over time.

Ensure your clients are doing all they can to help themselves in today’s market. Try the Standard Life Home Finance Voluntary Repayment Calculator today here.



1. Key Market Monitor H1 2023
This is intended for intermediaries only and has not been approved for consumer use. Back to newsroom