Equity release deferment rates explained

How do equity release deferment rates work?

Equity release is a way for homeowners to release a portion of their home’s value as tax-free cash, without having to sell the property or move out. Deferment rates play a role in determining the overall cost of an equity release plan.

The deferment rate is one of the more technical aspects of equity release. In fact, it’s not something that you’re likely to find mentioned in most providers’ product information. Instead, it’s one component in setting the equity release interest rate that an equity release provider will offer you.

Even so, you may find it interesting to read our guide to equity release deferment rates, which covers the following subjects:

• What is a deferment rate?
• Why is the deferment rate so important in equity release?
• How are deferment rates calculated?
• Will I know the deferment rate on my lifetime mortgage?
• How can I compare equity release rates?

We hope this information will help you understand equity release deferments rates and their effect on interest rates. For more information about equity release, including help and advice from our selected equity release advisers, please call us on 0808 178 3055 or request a call back. Alternatively, check your eligibility and get an initial indication of how much tax-free cash you could unlock.

What is a deferment rate?

The deferment rate is one of the tools that lifetime mortgage providers use when setting an interest rate. It’s just one component of complex calculations about your loan, the interest and your property’s estimated future value. 

You typically don’t pay interest during the term of your lifetime mortgage. These payments are in effect ‘deferred’ until the loan is repaid through the sale of your home when you pass away or move into long-term care. 

Providers use an equity release deferment rate when working out how much it costs them to defer the interest payments. It helps them assess how much your home will be worth at the end of your equity release plan, and how this compares to the amount of loan and interest that will be due at this time. 

There are plans where you can pay interest monthly so that it won’t be added to the amount that’s owed at the end of the plan. These are known as interest-only lifetime mortgages and can work out cheaper in the long run than plans where the interest payments are deferred.

Providers need to manage their risk 

Equity release providers include a ‘no negative equity’ guarantee to their customers. This means that even if the amount raised from the sale of the property doesn’t cover what’s owed, neither you nor your estate will be liable to pay any more. It’s one of the reasons why equity release horror stories – where some people’s families owed more than the property was worth – are now a thing of the past. 

Clearly this guarantee brings some risk to an equity release provider. They could potentially be unable to raise enough money from the sale of a property to fund the loan and interest repayment. They therefore take care to manage this risk, and the deferment rate is one of the tools they use to do this.

How are deferment rates calculated?

Lenders base the deferment rate on several factors, including:

Economic factors. Current market interest rates, inflation and economic forecasts are all taken into account by equity release providers.

The expected duration of the loan. This is based for example on average life expectancy. In some cases, providers offer an enhanced lifetime mortgage that also takes into account your own health and lifestyle and the effect this might have on life expectancy.

Provider-specific factors. Providers will also factor their own costs, risk assessments, pricing strategies and competitor analysis into setting deferment rates.

Why is the deferment rate so important in equity release?

The deferment rate is important as it directly influences the overall cost of your equity release plan. The higher the deferment rate, the more interest that accrues over the loan term. 

The amount of interest that accrues will affect how much money is left after the sale of your house to repay the loan. That could affect how much money you have when you move into long-term care, or how much is available to leave as an inheritance should you pass away.

Read more: How does compound interest on equity release work?

Will I know the deferment rate on my lifetime mortgage?

Equity release providers don’t tend to quote the deferment rate when offering you a lifetime mortgage. That’s because it’s just one of multiple factors and complex calculations used when setting the overall equity release interest rate they offer you.

You will be able to compare interest rates offered by a number of providers when choosing a suitable plan. Comparing deferment rates wouldn’t be of much practical value, since it is the interest rate that ultimately determines the overall cost of your lifetime mortgage.

How can I compare equity release rates?

Interest rates can vary significantly among equity release providers. Comparing rates is therefore important when finding the most cost-effective and suitable equity release plan.

Thankfully you don’t have to contact multiple equity release providers to compare interest rates. Equity Release Wise’s selected advisers can do this for you, gathering quotes from a number of leading providers on your behalf. They also provide information and advice to help you make the right decision about equity release.

Call us on 0808 178 3055 or request a call back and we will arrange an appointment with one of our selected equity release advisers. The initial advice or information is free and without obligation. You will only pay them a fee if your case completes, and you can pay this from the money you unlock if you wish.

About Richard Groom. A writer with 20+ years’ experience across several sectors including financial services, Richard has a passion for writing clear and simple content on even the most complex of subjects. In his spare time, Richard loves exploring the hills and mountains of the UK on long walks with his faithful cocker spaniel. Follow Richard on LinkedIn