302022Apr

Looking At Equity Release Interest Rates With A Fresh Perspective

The cost of living crisis currently gripping the UK has added yet another twist to the seemingly endless drama of the last few years. Whether it’s filling up at the pump or filling up your shopping trolley, everything seems dearer than ever in 2022.

But what about getting a mortgage? Well, for equity release, interest rates have been hovering around historic lows for quite some time, but that’s not to say that the lifetime mortgage is impervious to the odd interest rate jump.

According to recent research from Moneyfacts, equity release rates are up on average half a percentage point in 2022[1]. In fact, all equity release lenders –bar one, at time of writing  – have increased their rates since the beginning of the year and rates for the average lifetime mortgage (4.33% at the moment) are many times higher than those for a traditional mortgage. So does this spell disaster for equity release? Far from it. In fact, we all need to look at equity release rates with a new perspective.

It’s true, interest in interest rates will never go away. After all, when you get down to the brass tacks of any financial decision, how much the customer is going to pay will always be a significant – if not the significant – factor. But talking about rates within our market is always a little tricky.

Equity release is one of the only financial products where interest does not have an immediate impact on the customer. After all, those taking out a lifetime mortgage are not forced to make any monthly repayments and never have to unlike a normal mortgage because the interest rolls up, and yes interest is compounded but there are a number of customers who do not wish to make monthly payments for various reasons. This is not to take away the impact of interest rates, merely to demonstrate this feature as an advantage to a number of customers.

Now, you may say that equity release customers can make repayments if they want to. And you would be correct. Thanks to the Equity Release Council’s newest official safeguard, all new equity release plans that meet the ERC’s standards will allow for penalty-free partial repayments. But this will always be up to the customer, and never forced upon them like a traditional mortgage.

So, comparing interest rates directly to the mainstream mortgage market always becomes a little bit problematic. In truth, the lifetime mortgage is not like any traditional residential mortgage. Rather than siblings, they are more like cousins. The type of cousin you only ever see at Christmas. Distant.

So, let’s compare like for like. Regardless of the 0.5% rise in equity release interest rates, the average rate is still relatively low – at 4.33%. Compare that to the 6 – 8% equity release rates that prevailed in 2013/14, and we can see that rates are currently staying lower than they once were[2].

What’s more, the huge increase in product choice in the modern equity release market will help keep up healthy competition. Today’s market is awash with new policies and options for our customers. Just five years ago there was under 100 equity release plans available, and now there are more than 600[3]. This industry is growing and more new lenders, delivering more new products will surely impact on rates and flexibility.

Ultimately, interest rates are always going to be important for customers – especially when it feels like literally everything else is rising in price. But what we need to do is educate everyone about the realities of modern equity release. Explaining to the prospective customer, as well as the wider industry, that the lifetime mortgage is a unique offering that cannot be viewed as the same or even compared directly with the traditional mortgage, is the key.

Overall, it is still ‘cheaper’ to access your equity now than in recent times and with the new safeguards and protections launched by the Equity Release Council, and more products available now than ever before, the lifetime mortgage will ride out this new cost of living crisis and will likely come out the other side stronger than ever.