What does the Budget mean for equity release rates?
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Following the Chancellor’s Autumn Statement earlier today, the UK’s financial markets continue to stabilise after weeks of volatility and uncertainty. In particular, 10-year gilt rates are now back to pre-mini-budget levels, sitting around 3.1% – 1.4 percentage points lower than their peak in late September. So, does this now mean we can expect to see equity release quickly fall back into the historic low-rate environment we saw a few months ago?
Gilt rates aren’t the only factor
Sadly not. Although gilt rates certainly influence lifetime mortgage rates, they’re not the only factor. As well as today’s financial landscape, a lender has to consider where rates are likely to be once the case completes, which may be two or three months from application. So future positive or negative rate projections will be ‘priced in’ to today’s rates. As will the value of the no negative equity guarantee for customers while the outlook on house prices looks uncertain.
In addition, lenders also have to take into account recent history. During periods of market volatility, like we’ve seen over the past few months, risk comes at a cost. While gilts are risk-free for funders – their return is guaranteed over a pre-defined period of time – funding equity release isn’t. Mr and Mrs Smith’s plan could last five years, 15 years or even longer. So, although more rewarding, equity release comes with a higher element of uncertainty for funders, as they can’t guarantee when they’ll get their investment back.
In conclusion, then, we’re unlikely to see significant equity release price reductions in the near future. But that doesn’t stop equity release from being a viable financial option for your clients. And when considering equity release, and its current rates, it’s important to look at the product in context against the wider market.
So, how do today’s equity release rates compare against mainstream mortgages and other forms of borrowing, and what can historic data tell us about what to expect in Q4 2022, 2023 and beyond?
Equity release rates remain competitive versus other forms of borrowing.
Currently, the average standard five-year fixed mortgage rate is 6.07%.1 Meanwhile, lenders’ standard variable rates have risen to 6.49%1 and lifetime retirement interest-only mortgage rates are over 7% 2. Equity release rates, however, start at 6.15% and are fixed for the life of the plan – meaning, like a standard fixed-rate mortgage, your clients are insulated from any further market volatility.
As a result, equity release rates remain in tune with other more conventional forms of borrowing, and well below unsecured alternatives – with the average credit card interest rate reaching 22.2% in September this year.3
How current rates compare to the 2008 financial crash
Unlike many other financial markets, equity release remained well insulated from the fallout of the 2008 financial crash. Between H1 2008 and H1 2009, the average equity release rate only rose by 0.3% – from 6.2% to 6.5%. And although rates fluctuated ever so slightly in the years that followed, it wasn’t until H1 2016 that the average equity release rate dropped below 6%. In fact, in the decade between H1 2006 and H1 2016, the average equity release rate sat around 6.4%.
Meanwhile, in the mainstream mortgage market, SVRs hit their peak in H1 2008 at 7.5% before stabilising between 4% and 5% in 2011, which lasted until the pandemic. So, while both equity release rates and SVRs have risen recently, it’s more the case that they’ve returned to historic norms following a period of unnaturally low rates for the last few years.
And as markets adjust and stabilise once again, previous data suggests it’s unlikely we’ll see a return to those historic lows anytime soon.
What does this mean for your clients?
For many people, despite rises in interest rates, equity release could still be the right, and possibly only, option. Those with an interest-only mortgage reaching maturity, a fixed-rate deal about to expire, or who are subject to a lender’s SVR could be facing unaffordable costs to service an existing mortgage. Others may be struggling to repay unsecured debts as increases in the cost of living bite. And many will be facing both these financial challenges at the same time.
As a result, a large portion may feel as though they have no options, which is why it’s crucial these consumers are supported and made aware of the solutions available to them.
The flexibility of equity release
The features and benefits of a lifetime mortgage – the most common form of equity release – could give your clients greater control over their financial future than a standard residential mortgage.
Monthly repayments
Your client can choose whether to make monthly repayments or not. If they choose not to, they’ll likely have more disposable income available to meet more later life needs. And unlike with a residential mortgage, if your client chooses against making monthly repayments, they’re still guaranteed to remain the owner of their home and can stay in it for however long they choose.
However, if your client is in a position to do so, they could make ad-hoc partial capital or regular interest repayments to help manage the size of the loan and reduce their total cost of borrowing.
Repayments example
John and Joyce are both 65 and wish to release £50,000 from their averagely-priced home of £296,000 to repay their existing mortgage. Securing a fixed lifetime mortgage rate of 6.15%, after 15 years, with no monthly repayments, John and Joyce owe £122,397. However, by repaying just £100 a month, after 15 years, the couple’s outstanding balance has reduced to £96,026 – a net saving of £8,371, when including the £18,000 they’ve already repaid. But if John and Joyce were to repay £200 a month, they’d owe £66,569 after 15 years – a net saving of £19,828. And if the pair were to service the interest in its entirety each month (£256), they’d enjoy a net saving of £26,317 – extra value which could be passed down to their loved ones as part of an inheritance.
Remortgage
The lifetime mortgage your client chooses today doesn’t have to be their plan for life. In as little as five years, your clients could have the option to remortgage to a plan which may better suit their future needs without any early repayment charge. That could be to release further funds, include features which help address new priorities or secure a better interest rate. And even if your client wishes to remortgage within their plan’s ERC period, most lifetime mortgages come with fixed, transparent ERCs, meaning they always know how much it’ll cost to repay their loan.
No negative equity guarantee
Each lifetime mortgage that meets Equity Release Council standards comes with a no negative equity guarantee. So, no matter what, your client will never owe more than their home’s value, even if house prices fall.
That’s alongside them retaining full ownership of their home and having the right to remain in their property for as long as they choose – two more guarantees which are included in all plans that meet Equity Release Council standards.
In conclusion, a lifetime mortgage can help your clients meet their current needs now; whether that’s repaying an existing mortgage or debts, gifting to a loved one or adapting their property for later life, and still give them flexibility, freedom and security to manage or switch their plan in the future.
The importance of expert advice
In economic conditions such as these, where factors such as lack of financial resilience may be particularly prevalent, it’s crucial consumers receive specialist equity release advice in order to make an informed decision.
Given the pressure your clients may be feeling in the short term, it’s important for them to consider if they really need to access the whole release amount now, or if they’d be better off waiting to see if their circumstances improve. Also, it’s paramount to explain the impact that making repayments have on reducing the amount owed should they be in a position to service the loan, either regularly or on an ad-hoc basis. This will help ensure your client has a better understanding of how to reduce their total cost of borrowing and provide a more personalised customer outcome.
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1 Moneyfacts
2 ERS
3 The Times