Why conversations around affordability are more important than ever

Today’s equity release market is evolving. Following market uncertainty and higher standard variable rates, new later life lending products have begun to emerge offering more options to offset the impact of compound interest, and reduce a client’s total cost of borrowing.

Naturally, in this current climate, paying off existing debts, whether in the form of a mortgage or unsecured debts like credit cards is a major focus for many. Therefore, customers are looking for the most suitable and cheapest options when it comes to later life finance.

One such option is Standard Life Home Finance’s Horizon Interest Reward lifetime mortgages, which offers discounted interest rates to customers who are able to commit to servicing 25, 50, 75 or 100% of their interest over a five, 10 or 15 year period.

Better questions, better outcomes

When deciding which payment term and percentage of interest-served best suits your client's needs, it is important to discuss their current level of affordability and consider if this will support their interest payments both now and throughout the duration of their chosen payment term.

With Standard Life Home Finance’s Horizon Interest Reward lifetime mortgages, your clients will get the benefit of a discounted interest rate and a monthly repayment commitment typically lower than if they were to remain with traditional mortgage on a standard variable rate of interest.[1]

Taking the time to have these conversations with your clients is especially important following the Equity Release Council’s new industry standards announcement on the 1 March this year. Advisers must take great lengths to ensure clients are fully informed on their options relating to affordability.

How much could my client save with Standard Life Home Finance’s Horizon Interest Reward?

At first glance of Standard Life Home Finance’s Horizon Interest Reward rate discount sheet, it may seem that the most obvious solution would be for clients to opt into the longest possible term and pay 100% of the interest to unlock the best rate discount.

However, whilst agreeing to the longest payment term can help your client significantly reduce their total cost of borrowing, if the payment term ends early due to your client failing to keep up with interest payments, it doesn’t necessarily provide the lowest total cost of borrowing when compared with other scenarios, as demonstrated below.

If the payment shortfall goes over the value of 3 monthly payments, the discount will automatically be removed, and the product will revert to the non-discounted rate that would have applied at the point of completion.

In the example above, if your client can make payments for 15 years (Scenario A), they will benefit from the lowest total cost of borrowing (￡177,695).

However, if your client’s circumstances change and they are only able to make payments for five years (Scenario C), they will revert back to the non-discounted rate from year five due to their decision to commit to the longest payment period but stopping payments early.

As the example above shows, this doesn’t give your client the best customer outcome, even though they initially benefit from a lower interest rate.

However, if this client had chosen to commit to a five-year payment term instead (Scenario B), they will have accessed a smaller discount, but due to completing their five-year payment term, the discounted rate would have applied for the lifetime of their loan.

This leads to Scenario B having a lower total cost of borrowing than Scenario C, therefore delivering a better customer outcome for this case.

Finding the plan that suits your client

As you can see from the table above, the longer the payment term and the more interest your client chooses to pay the lower the overall cost of borrowing. However, if this option doesn’t suit your clients’ current and future levels of affordability, Horizon Interest Reward offers the flexibility to tailor plans to individual needs.

Which is why alongside setting payment terms at 5, 10 and 15 years, clients can also select the level of interest they choose to pay off, allowing you to help further tailor their plans to balance short-term affordability with a lower cost of borrowing in the long term.

Why does this matter to advisers?

With the Equity Release Council introducing new standards on the 1st of March 2024, all advisers are required to prove they have taken a diligent approach to the products they have offered to customers, and whether they meet customer needs around affordability.

With the creation of Horizon Interest Reward, advisers not only have a new product to offer their clients, but a solution towards providing better, more affordable options that will help with their retirement finances.

Unlock the power of choice with Horizon Interest Reward.

[1] Based on an average standard variable rate (SVR) for Nationwide, Barclays, Lloyd's & Santander – accurate as of 22/03/24