After weeks of fluctuation and uncertainty across the UK’s financial markets, consumers are now starting to feel the impact it’s having on their day-to-day finances. Despite the forecast peak Bank of England (BoE) interest rate falling following new Chancellor, Jeremy Hunt’s mini-budget U-turns – down to 5.15% from 5.75%1 – and the pound recovering some of its value, lenders are still taking no risks.
As a result, the average two-year fixed mortgage rate now sits above 6% for the first time in 14 years2. For a customer moving from a 2.24% rate secured in September 2020 – the average two-year fixed rate at the time2 – with a 25-year mortgage of £250,000, this will represent a £532 increase in monthly repayment.3
What does this mean for consumers?
This year has already seen energy, fuel and food prices soar. Given the scale of these increases, it’s likely that for many this combination of price hikes will have already exceeded their disposable income. Against this backdrop, it’s not difficult to imagine the impact a rise of £532 in mortgage payments would have on someone’s finances, particularly for those in later life who still require a mortgage.
At a time of life when most are hoping to squirrel away as much as possible to enjoy later life, research found a third of over-55s were already claiming they expected to accrue debt over the next year just to make ends meet, before the recent surge in the cost of living. And with the average secured debt of a 55-64-year-old household at £127,6004, the significant rise in interest rates will have a dramatic effect on the cost of their mortgage every month, only adding to the financial stress they’re already experiencing.
Compounded by lower product availability and tougher affordability criteria, many who are facing a maturing interest-only mortgage or the end of their promotional rate may simply not be able to afford to stay in their homes. A sentiment sadly shared, with Consultancy Capital Economics stating: “The scale of the increase in mortgage rates means that a large rise in mortgage arrears and repossessions is probably unavoidable.”5
Consider property wealth as an option
While it’s expected that the total debt of those aged 55 or over in the UK will reach £294billion this year4, homeowners of the same age bracket are reported to have a collective property wealth of £4.4trillion.6 By accessing some of that property wealth, homeowners could not only repay their mortgage, but also free up more disposable income for other needs or wants. Downsizing is, of course, one option. But with uncertainty around house prices and a lack of suitable, affordable later life housing stock, selling on and buying elsewhere may not be a credible solution. Another option, however, could be equity release.
Equity release could be the solution
Equity release gives homeowners access to some of their property’s value in tax-free cash, enabling them to clear their existing mortgage, all without the hassle of moving. And with a lifetime mortgage – the most popular form of equity release – there are no mandatory monthly repayments, meaning they’ll be better able to balance their later life finances with a boost in disposable income. Other benefits include interest rates fixed for life, full ownership of your home and there are no affordability criteria.
So, those facing an almost-impossible situation right now shouldn’t feel as though they have no options. With the modern lending features of equity release, they may be able to stay in the home they love, boost their disposable income, protect themselves against any further market volatility and live out a more comfortable later life.
The importance of expert advice
Consumers facing financial hardship are more likely to be vulnerable – perhaps for the first time in their lives. That means they could be susceptible to making poor financial decisions, especially when it comes to borrowing. It’s therefore more crucial than ever that consumers seek out expert advice to ensure they are balancing their short-term needs with their long-term plans before making any decision.
Given the unpredictability of the UK’s financial markets in recent times, and an increase in financial vulnerability, receiving the right advice is paramount for your client. Air is the next generation, industry-leading later life lending platform which lives and breathes your growth as an adviser. Enabled by technology, knowledge and people, we offer financial professionals, from advisers to lenders, best-in-class digital sourcing tools, personal development services and incentives; all designed to support and reward your business growth, especially through this challenging time.
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1 Reuters & Sky News
4 more2life: Borrowing in later life 2022
5 Capital Economics
6 ONS via City A.M.