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How Equity Release Products Work
Equity release products allow a person aged over 60 to use the equity they have built up in their home.
They can use the proceeds to gift money to children, grandchildren or elsewhere, renovate the house, buy a new car, take a holiday or provide extra money for living expenses.
With reverse mortgage products the loan does not have to be repaid while the borrower remains in the house. This means that the amount borrowed and the interest on that amount, as well as any fees levied, compounds.
For example, suppose a person borrowed $100,000 at 8.2% then the amount outstanding increases in the following way:
| Year | Amount Owed at Start of year | Interest in Year | Amount owed at end of year | Value of Property | Equity in Property |
|---|---|---|---|---|---|
| 1 | $100,000 | $8,515 | $108,515 | $515,000 | $406,485 |
| 2 | $108,515 | $9,240 | $117,756 | $530,450 | $412,694 |
| 3 | $117,756 | $10,027 | $127,783 | $546,364 | $418,581 |
| 4 | $127,783 | $10,881 | $138,664 | $562,754 | $424,090 |
| 5 | $138,664 | $11,808 | $150,472 | $579,637 | $429,165 |
| 6 | $150,472 | $12,813 | $163,285 | $597,026 | $433,741 |
| 7 | $163,285 | $13,904 | $177,189 | $614,937 | $437,748 |
| 8 | $177,189 | $15,088 | $192,277 | $633,385 | $441,108 |
| 9 | $192,277 | $16,373 | $208,650 | $652,387 | $443,736 |
| 10 | $208,650 | $17,767 | $226,418 | $671,958 | $445,541 |
| 15 | $313,960 | $26,735 | $340,695 | $778,984 | $438,289 |
| 20 | $472,421 | $40,228 | $512,649 | $903,056 | $390,406 |
It needs to be borne in mind that the value of the property is also compounding as the table shows. Suppose the property that backed this borrowing was worth $500,000 when the borrowing commenced, then assuming 3% house price growth, that property would be worth about $672,000 after 10 years and just over $900,000 after 20 years. In fact allowing for the above assumptions the amount borrowed and the compounding interest would not exceed the value of the property for over 30 years.
This is a fairly conservative estimate of house price growth given the historical trend in Australia, but it is obviously sensible to adopt this approach. It should also be remembered that RBS offers an option to protect up to 25% of the customer's equity, which can be used if the customer is seeking certainty in having some equity remaining either for themselves or for their estate.
You can use the calculators on the website to test different scenarios of house price growth and interest rates, plus the term of the loan, to see how much equity a customer will have left when the loan is repaid.