Equity Release Gilt Yield Linked Redemption Penalty

Published / Last Updated on 19/03/2019

Equity Release Gilt Yield Linked Redemption Penalties Explained:

E.g. A company borrows more to buy an aeroplane or lend money to you: Corporate Bond £100 with a yield of 3% pa. (If Bank interest rates are 1% pa that’s a 2% risk margin) = £3pa income yield.

  • If interest rates rise from 1% to 2% therefore the Bond yield required is now 4% (2% bank interest rate + 2% risk margin). This means to get £3pa income you would only need to pay £75 for the above “£100 Corporate Bond” paying 3%. The real value of the debt has fallen!
  • If interest rates fall from 1% to 0.5% therefore the Bond yield required is now 2.5% (0.5% bank interest rate + 2% risk margin). This means to get £3pa income you would now need to pay £120 for the above “£100 Corporate Bond” paying 3%. The real value of the debt has gone up!

This is the same for equity release:

An equity release company borrows money (e.g. issuing Corporate Bonds) at say 3% pa.

  • If interest rates rise, if demand for bonds fall, i.e. Bond/Gilt Yields rise
  • The real time sale value of the bond debt will fall
  • I.e. little or no redemption penalties on repayment equity release loan.

If Rates Rise

  • If interest rates fall and/or demand for bonds increase (as a safe haven investment) I.e. Bond/Gilt Yields fall
  • The real time sale value of the bond debt will rise
  • Meaning higher redemption penalties on repayment equity release loan

It is costing the equity release company more after all, to buy its way out of the money it borrowed to lend you, it therefore charges you more with a higher redemption penalty.



Top