One of the great conveniences of homeownership is that, in the worst case scenario, you can always cash in by taking some of your property’s equity.
And the amount you can free up has never been better, thanks to high real estate prices.
But sharp rises in interest rates mean that releasing equity now costs a lot more than it did 12 months ago. Owners cashing in today will be £87,000 worse off than a year ago as borrowing costs rise.
Equity release: Owners cashing in today will be £87,000 worse off than a year ago as borrowing costs rise
Tens of thousands of elderly property owners have converted their homes into ATMs in the past year to cope with the rising cost of living and help family members.
Others also use equity release to pay off debt, make home improvements, or fund vacations and other luxuries.
But some advisers warn that homeowners who make a deal now face higher rates than in the past — and may regret it if rates fall in the future.
Equity release mortgages, or lifetime mortgages, are taken out by people over 55 who want to cash in part of the value of their home.
Unlike traditional mortgages, borrowers do not pay monthly interest. Instead, interest payments, which are fixed from the start, are automatically included in the loan, meaning that the debt is considered a snowball over time.
Typically, the debt and interest are not repaid until the owner of the property dies, sells, or moves to a care home. This means there are no monthly payments as with conventional mortgages.
But compound interest means that even a small difference in the fixed interest rate can add hundreds of thousands to the loan.
The interest on these mortgages now averages 6.43 percent, compared to the average interest rate of 3.71 percent in the first half of 2022.
Today, rates vary between 5.61 percent and 8.37 percent depending on the provider, according to the Equity Release Council (ERC), which promotes the equity release industry and the rate-monitoring website Moneyfactscompare.
Someone who today took out £100,000 over 15 years would see the amount owed rise to £261,673, thanks to an interest bill of £161,673.
The same figure taken a year ago at 3.71 per cent would have grown to £174,306, which would have cost less than half in interest – £74,306. That’s £87,367 cheaper than today over the life of the loan.
In three years the difference will be even greater. In May 2020, rates were much lower, between 2.54 percent and 6.60 percent — an average of 4.27 percent.
Someone taking the lowest rate three years ago would be £115,357 better off than they are now. The amount owed would be just £146,316 after 15 years.
Activity decreases
The number of people over 55 resorting to equity disclosure increased in 2022. But since then, the activity has “fallen off a cliff,” says independent financial adviser Andy Wilson. “Many people choose to bide their time when interest rates are so high.
“I have clients who thank their lucky stars for taking out a home equity mortgage when interest rates were below 3 percent, instead of taking out a new mortgage at 7 percent.”
The number of homeowners calling on their assets fell by almost a third in the first three months of the year compared to 2022.
Total lending reached a six-year low of £699 million over three months, the ERC says.
Anyone who borrows now does so out of necessity, says Wilson. “The reasons why people take out equity release mortgages have changed,” he explains. ‘When the rates were lower, there was more ambition to borrow for things like holidays, campers or refurbishing your garden. But with the rising cost of living, there is a shift to borrowing to cover day-to-day expenses.”
Jo Gardetta, 63, a writer from north London, is among those who have put off plans to take out a mortgage, hoping interest rates will fall.
“My financial advisor told me that releasing equity would have been a good option a few years ago, but now it would be financial suicide,” she says.
Jo would like to free up some cash when her £165,000 mortgage comes due in September 2025.
One option is to downsize from her £500,000 two-bedroom flat in Islington. However, if she sold it, she probably wouldn’t get another property there.
“Getting a lifetime mortgage is definitely something I’ll look into if rates were to fall.”
Why are rates rising?
As with standard mortgages, equity release rates broadly follow the base rate set by the Bank of England.
Base rates have risen 12 times in a row, by 4.4 percentage points over the past 18 months from a historic low of 0.1 percent in December 2021.
The price of gilts, or government-backed bonds, also affect stock releases.
Andy Wilson of Andy Wilson Financial Services says: “Government bond prices are still rising. This means that lenders close their deals and issue them at higher rates, so people need to think carefully about their stock release choices.
‘The most important questions are: will it be cheaper in the future? Do they need the money immediately? What’s the money for?’
The Bank of England’s key interest rate is expected to rise to around 5.5% this year to tackle high inflation. However, it is predicted to decline after that, as are share release rates.
There is no guarantee that rates will not rise further before they begin to fall. However, those who don’t need the money right away may be able to avoid high rates if they watch the market and wait.
Jim Boyd, from the ERC, points out that rising interest rates are not unique to stock releases.
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