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2022 has been a tumultuous year with three Prime Ministers, numerous Bank of England base rate increases, inflation hitting double figures, the country entering recession, and a cost-of-living crisis that is putting millions of pensioners into financial difficulties.
With all these things happening, I thought it would be a good idea to investigate whether or not equity release could be a viable option for people now and moving forward into 2023. I have done some research, so let's look into this in more detail.
What has been happening with interest rates?
The Bank of England base rate is currently 3%. This is the highest it has been since November 2008 and the increase of 0.75% from 2.25% on the 3rd of November 2022 was the largest increase in the Bank of England base rate in thirty years.
This interest rate hike, along with the others in 2022 has caused concern for many people, however according to an article in the Financial Times on the 3rd of November:
“The Bank of England has signalled that borrowing costs will not rise as much as markets expect in the future…. The central bank issued unusually strong guidance that rates would not need to rise much further to bring inflation back to its 2% target, partly because it forecast a prolonged recession ahead”.
The expectation is that the base rate will remain lower for the foreseeable future than the 6% which it was in February 2000, and way below its highest point in recent times, in October 1989, when it was 14.88%, a time that many of my clients remember all too well.
What are the consequences of higher interest rates?
Whilst the recent Bank of England base rate increases may have been helpful to savers, anyone borrowing money will now have to pay significantly more than was the case even a few weeks ago.
The recent increases in the Bank of England base rate have been reflected in the increasing interest rates for equity release plans. The vast majority of equity release plans are based on a lifetime mortgage. With these types of plans, interest is accrued on a compound basis until the plan is ended. This is usually when the homeowner owner either dies or moves into full-time residential care. The compound nature of interest on lifetime mortgage equity release plans means that the overall cost of a plan can rise dramatically as interest rates go up. This can be demonstrated in the table below:
| Interest at 4.19% | Interest at 7.55% |
Equity Released | £100,000 | £100,000 |
Total interest over 15 years | £85,093 | £197,959 |
Total cost over 15 years | £185,093 | £297,959 |
In this example I have assumed that the homeowner takes out £100,000 equity from their property and that this loan is repaid from the value of the property after 15 years. The interest rate of 4.19% is used in the example as it was a typical fixed rate of interest that could have been achieved by clients taking out equity release a year ago. I have used the comparison rate of 7.55% as this is a typical rate that is currently being offered to people taking out equity release on fixed rate plans.
The example makes it easy to understand why some homeowners may be put off taking out equity release with the current high rates of interest, however this is not the case for everybody.
What Equity Release safeguards are in place?
With the recent volatility in the economy, it is completely understandable that people are worried about their options, and if that there are safeguards in place if they decide to proceed with an equity release plan.
The Equity Release Council is a voluntary body which aims to ensure that its members are highly professional and act with integrity and transparency in offering high-quality products and services to customers.
The Standards Board is incorporated as part of the Equity Release Council and exists to ensure that equity release products are safe and reliable for consumers.
Their product standards are as follows:
· For lifetime mortgages the rate must be fixed for each release or, if variable, the rate must be capped for the life of the loan.
· You must have the right to remain in your property for life or until you need to move into long-term care, provided the property remains your main residence and you abide by the terms and conditions of your contract.
· You have the right to move to another property subject to the new property being acceptable to your product provider as continuing security for your equity release loan.
· The product must have a “no negative equity guarantee”. This means that when your property is sold, and agents’ and solicitors’ fees have been paid, even if the amount left is not enough to repay the outstanding loan to your provider, neither you nor your estate will be liable to pay any more.
· All customers taking out new plans which meet the Equity Release Council standards must have the right to make penalty free payments, subject to lending criteria.
What are people currently using equity release for?
The cost-of-living crisis can be especially hard for people who are close to, or who have already retired. High levels of inflation can rapidly erode the value of pensions and savings, and in addition, these people have limited, or no time to build their financial resources once they stop working.
As the cost-of-living crisis has begun to affect everyone’s lives, I have seen a decline in people releasing the equity in their property for luxuries, such as holidays or campervan purchases. My clients are releasing equity for more pressing needs, such as moving home, gifting to family members for house deposits, or simply making use of released money to supplement their income.
There are currently over a million Interest Only mortgages outstanding in the UK, and some of these homeowners will be unable to repay the outstanding capital when their mortgage ends. A number of my clients in this situation felt that their only option would have been to sell their family home, however there can be other solutions, such as equity release, that may be available.
What advice would I give my clients?
Deciding to take out an equity release plan is a major financial decision. It is important to take independent financial advice about this decision, and your own financial circumstances, and what you hope to achieve through equity release will need to be considered in detail. That said, equity release can still make sense in these turbulent times.
It is important to understand the ramifications of rolled up interest, and I would always recommend that clients service their debt if at all possible.
If you are considering equity release for more aspirational borrowing, it might be wise to take a wait-and-see approach while interest rates are higher than they have been. Alternative borrowing solutions may be more suitable at the moment for some clients, as they may be more cost-effective to re-broke at a later date, if and when rates decrease.
Unfortunately, we simply cannot predict what is going to happen with interest rates and for some people who need to make a financial move now, whether that be moving home, repaying an existing mortgage, gifting to family members for house deposits, or simply making use of released money to supplement their income, taking an equity release plan could be the best solution.
If you want to find out more about equity release and whether it is right for you, please click on the link below to get in contact with me.
