Equity release costs £87K more than a year ago, but is it about to get better?

One of the great comforts of home ownership is that, if worst comes to worst, you can always cash in by extracting some of the equity from your property.

And the amount you can release has never been better, thanks to high property prices.

But sharp interest rate rises mean that equity release now costs far more than 12 months ago. Owners cashing in today will be £87,000 worse off than they would have been a year ago as borrowing costs soar.

Equity release: Owners cashing in today will be £87,000 worse off than they would have been a year ago as borrowing costs soar

Equity release: Owners cashing in today will be £87,000 worse off than they would have been a year ago as borrowing costs soar

Tens of thousands of older property owners have turned their homes into cash machines in the past year to cope with the rising cost of living and help family members.

Others also use equity release to pay off debts, carry out home improvements or to fund holidays and other luxuries.

But some advisers warn that homeowners who lock into a deal now face higher rates than in the past — and could come to regret it if rates drop in future.

Equity release mortgages, or lifetime mortgages, are taken out by over-55s who want to cash in some 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 rolled up automatically into the loan, meaning the debt snowballs over time.

Typically, the debt and interest is not repaid until the property owner dies, sells up or moves into a care home. This means there are no monthly payments as with conventional mortgages.

But compound interest means even a small difference in the fixed interest rate can add hundreds of thousands to the loan.

Interest rates on these mortgages now average 6.43 per cent, up from the average rate of 3.71 per cent in the first half of 2022.

Today, rates range between 5.61 per cent and 8.37 per cent depending on the provider, according to the Equity Release Council (ERC), which promotes the equity release sector and rates monitoring website Moneyfactscompare.

Someone taking out £100,000 today over 15 years would see the amount owed rise to £261,673, thanks to an interest bill of £161,673.

The same figure taken out one year ago at 3.71 per cent would have grown to £174,306, costing less than half in interest — at £74,306. That is £87,367 cheaper than today over the loan’s lifetime.

The difference is even greater over three years. In May 2020, rates were far lower, between 2.54 per cent and 6.60 per cent — averaging 4.27 per cent.

Someone taking out the lowest rate three years ago would be £115,357 better off than now. The amount owed would be just £146,316 after 15 years.

Activity is dropping

The number of over-55s resorting to equity release spiralled in 2022. But activity has since ‘dropped off a cliff’, says independent financial adviser Andy Wilson. ‘A lot of people are choosing to bide their time while interest rates are so high.

‘I have clients who are thanking their lucky stars that they took out an equity release mortgage when rates were below 3 per cent rather than taking out a new mortgage at 7 per cent.’

The number of homeowners who tapped into their property wealth fell by nearly a third in the first three months of the year, compared with 2022.

Total lending hit a six-year low at £699 million over the three-month period, the ERC says.

Those borrowing now are doing so from necessity, Mr Wilson says. ‘The reasons people are taking out equity release mortgages have changed,’ he explains. ‘When rates were lower, there was more aspirational borrowing for things such as holidays, motorhomes or doing your garden up. But with the rising cost of living, there’s been a shift to borrowing to cover everyday costs.’

Jo Gardetta, 63, a writer from North London, is among those who have delayed plans to take out an equity release mortgage, hoping rates will fall.

‘My financial adviser told me equity release would have been a good option a few years ago but that it would be financial suicide now,’ she says.

Jo would like to free up some cash when her £165,000 mortgage ends in September 2025.

One option is to downsize from her £500,000 two-bedroom Islington flat. However, if she sold it, she would be unlikely to get another property there.

‘Getting a lifetime mortgage is definitely something I’ll look at if rates were to come down.’

Why are rates rising?

As with standard mortgages, equity release interest rates broadly track the base rate set by the Bank of England.

Base rate has risen 12 times in a row, rising by 4.4 percentage points in the past 18 months from a historic low of 0.1 per cent in December 2021.

The price of gilts, or Government-backed bonds, also affects equity release rates.

Andy Wilson, of Andy Wilson Financial Services, says: ‘Government bond prices are still rising. This means lenders are pulling their deals and issuing them at higher rates, so people should think carefully about their equity release choices.

‘The key questions to ask are: Will it be cheaper in the future? Do they need the money straight away? What is the money for?’

The Bank of England base rate is predicted to rise to about 5.5 per cent this year to tackle high inflation. However, it is forecast to fall afterwards, as would equity release rates.

There’s no guarantee that rates won’t rise further still before they start to fall. However, those who don’t need the cash straight away may be able to avoid high rates if they watch the market and wait it out.

Jim Boyd, of the ERC, points out rising interest rates aren’t unique to equity release.

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