With the Bank of England (BOE) increasing rates to 5% – the 13th consecutive rise and the highest level since 2008 – Air asked its members, Ambassadors and other bodies, for their views on these changes and what the impact might be on the later life lending market.
While rates in this sector are less impacted by the BOE base rate as they correspond more closely to the gilt markets, headlines are likely to have impacted customer confidence and advisers will need to work harder than ever to support older homeowners.
Stuart Wilson, Chairman of Air Club, kicked off the commentary by saying:
“As the Bank of England once again announces a successive rise in interest rates, borrowers may reasonably feel concerned about the macroeconomic impacts on their daily lives. Yes, the measures may bring inflation under control, but the decision will increase the pressure on already pinched wallets, especially as we enter the height of a remortgaging year.
“However, the market mood music is not entirely downtempo, and it’s important that we remain realistic. As a record number of borrowers consider their next move, the value of professional financial advice has rarely been more profound. This is especially true for older customers, many of whose affordability may be limited by fixed incomes.
“While rates in the equity release market are not directly impacted by this recent announcement, they are higher than 12-months ago and now is the time for advisers to ensure customers are considering all the inbuild flexibilities available.
“Delivering good customer outcomes needs to be paramount and with the right financial advice, borrowers should find that navigating the current landscape is perhaps not as tricky as feared.”
Mark Lambert, Director at Viva Retirement Solutions, followed up by outlining his views:
“I see the recent increases to the Bank of England interest rates as a double-edged sword for potential customers of Equity Release products.
“On the one hand it increases their cost of living, either directly increasing their own existing mortgage payments (either immediately if on a tracker/SVR or in the near future when the current fixed rate ends), or indirectly by increasing the mortgage payments of commercial and retail units who then pass these increased costs on to their customers. This stretches further the often-fixed retirement incomes our potential clients have. which increases the need for the types of products we specialise in.
“But on the other hand, the increased rates deter potential clients from even making enquiries as to the feasibility of taking out an Equity Release style plan, for fear that the cost of borrowing would be too high for them to accept, even if the plans available to them offer a perfect solution.
“This is a real dilemma for many potential clients. We have benefitted from exceptionally low interest rates for a number of years, so much so that they became the norm. Now with rates returning to ‘normal’ levels, I feel it will take some time for consumer confidence to return to our market, so we all need to be as proactive as possible in getting the message out there that Equity Release plans are an option that should most certainly be considered.”
Kay Westgarth, Director of Sales at Standard Life Home Finance, suggested
“Today’s interest rate rise may not have been unexpected, but it was certainly unwelcome with thousands of people who are heading towards the end of their fixed rate deals or trapped on their lenders standard variable rate particularly impacted.
“Older homeowners who may have repaid their mortgages or taken out an equity release plan which boasts rates which are fixed for life are less likely to be feeling this pressure. However, they will no doubt notice the impact on loved ones and the ‘bank of mum and dad’ will become an even more important lending institution – albeit with far better rates than you see on the high street.
“That said, it is vitally important that older people balance their desire to help their families and the need to maintain their own standard of living in retirement. Our own research identified that the majority of families (88%) are supportive when their older relatives consider equity release as they wanted them to do the right thing for their individual circumstances.
“With the support of a specialist financial adviser, older homeowners can use equity release to achieve both objectives in a way that is sustainable for both the long and short term.”
Sandy Ameer-Beg, Director at Acclaim Mortgage Consultancy, commented:
“Whilst the Bank of England rate rise is unwelcome, the age demographic of the clients who we are looking to assist in the Later Life market, will look at these rates as being relatively modest by historic standards of the 1980’s, 1990’s and early 2000’s. As such, if we, as an industry or the media/press as commentators on the market, constantly go on about rates being high, then we will talk potential clients out of doing anything.
“There is still a huge demand for our services, and we must get out there, even more than before, to explain the significant benefits of the use of property wealth in clients overall financial planning. With the cost of living increasing and the need to manage budgets in retirement still being a huge issue for many on a fixed income, or for those trying to become “empty nesters” by helping the younger generation onto the property ladder, there are still many reasons to be out there proactively helping people through these challenging times.”
“People who have been considering taking out a Lifetime Mortgage will no doubt want to re-evaluate their options as the bank rate rises, due to the current correlation with the longer-term gilt market as well as swap rates increasing. While most customers appreciate the consistency of rates on lifetime mortgages being fixed for life, recent moves mean that it has become more expensive to borrow money via this route over the long-term.
“If the reason for borrowing is for “luxuries” or things that can be put off, clients, I feel, will hold off and wait for more stability and lower interest rates before committing. To these clients I say – do weigh up all options, but do not forget that if you want to leave as much to your estate as possible, then consider making repayments on an on-going basis.
“If a plan has an interest rate of 7% and you can manage to pay half of the interest as you go, then it will take 20 years or so for the remaining interest to double. Depending on the choice of product, there is also the option for smaller loan to rebroke when interest rates eventually fall.
“If clients “need” to take out a Lifetime Mortgage, then I would argue that the interest rate is irrelevant, as long as all other avenues have been fully explored. At the same time advisers may also see an influx of new enquiries, as the bank rate rises will force many people with current conventional mortgages to re-consider their options and many may well need to move across to a Lifetime Mortgage to keep their heads above water.”
Ben Waugh, Managing Director at more2life, added:
“The Bank of England’s decision to increase interest rates to x% was no doubt a hard one and based on the need to control runaway inflation but this will come as cold comfort to many older borrowers – especially those coming off fixed-rate deals and reverting to their lender’s standard variable rate.
“Affordability will remain a key issue and a lot of borrowers will be forced to reassess their options as they see repayments increase sharply. Even those even those over-55s who are lucky enough to have paid off their mortgage are likely to be finding balancing their finances tricky as while headline inflation is high at 8.7%, inflation on food is more than double that at 18.3%.
“There is no quick fix but advisers in the later life lending market are ideally placed to support people who are trying to find the right option for their individual circumstances. With equity release plans offering the opportunity to make ongoing interest as well as lump sum repayments, interest-rates fixed for the life of the loan and some products allowing people to remortgage penalty free after just four years, there are a lot of positives to speak to customers about.“
David Forsdyke. Head of Later Life Finance at Knight Frank Finance, said:
“Lifetime mortgage rates are different to standard mortgage rates as they move with long term Gilt and Fixed Interest yields, rather than Bank of England base rate. A good indicator is the 15-year Gilt index, which rose from around 3.6% in March to 4.6% today. The forecast is for it to rise further to possibly above 6% by March 2024. Lifetime Mortgage rates are therefore likely to rise steadily for the next 6 to 12 months.
“In order to best serve older consumers, Equity Release advisors need to look beyond Lifetime mortgages. The mortgage market now offers older homeowners a range of products and options. Gone are the days when all mortgage lenders drew the line at a certain age. Many lenders now allow borrowers to take their loan to age 85 or beyond, and others have removed their age limits completely. As long as you can afford to meet the regular payments, lenders will lend.
“We are also entering a period of innovation and expansion in ‘Later Life’ product design. More hybrid products, retirement mortgages and other borrowing options will emerge for older consumers, so for advisors willing to diversify I believe the future is bright with opportunity.”
Simon Webb, managing director of capital markets and finance at LiveMore, added:
“The unprecedented 13th consecutive rise in the Bank of England base rate in 18 months, with further rises anticipated, is a price Chancellor Jeremy Hunt is willing to pay as bringing down inflation is the government’s ultimate goal.
“Although rates are much higher now than we have been used to for 13 years, we are in a more normal interest rate environment if you compare it to the pre global financial crisis era. Base rates back then were between 4% and 6% from 2004 to October 2008. Lifetime mortgage borrowers will remember these rates so the current rates shouldn’t be too much of a shock compared to younger first-time buyers and home movers.
“One consequence of the higher rates could be more activity from the Bank of Mum and Dad. To help younger family members onto the housing ladder, parents and grandparents may opt to release equity from their homes to help with deposits. They could even use the money to make an overpayment on their offspring’s mortgage to bring down either the monthly payments or the term.”
Georgina Oxton, Divisional Manager, Equity Release at LV= , added:
The Bank of England’s decision to raise interest rates by 0.5% shows us that inflation is proving challenging to get under control in the UK. This will undoubtedly mean continued challenges for our market, but there is still customer demand/need for equity release. According to recent LV= research, 44% of retirees wish they’d saved more into their pension and 1 in 10 retirees had mortgage debt when they retired. With 31% of homeowners surveyed either having a lifetime mortgage already, or being willing to consider a lifetime mortgage in the future, it is clear this customer demand will continue.
With core inflation reaching a 20 year high of 7.1%, retirees in the UK have had to bear the harshest cost of living challenges on a fixed income. Consumers are much more considered about how they use later life lending products and their features to better suit their needs. For most homeowners their property is one of their biggest assets, so it’s critical that professional personalised financial advice is available to anyone looking at releasing equity.
Will Hale, CEO of Key, the UK’s largest later life advice firm, concluded:
“While today’s increase to the base rate has been deemed necessary to manage inflation, it is hard not to worry about the impact this will have on ordinary families. Whether they are younger borrowers who took their first steps onto the ladder in a relatively low interest rate environment or older homeowners on a fixed income, the need to find hundreds of pounds more each month to pay their mortgage is likely to be worrying.
“There is no simple answer but people should not rely on interest rates falling as fast as they have risen as this is unlikely to be the case. Instead, they need to consider all their options and – if possible – speak to a mortgage broker who will be able to help them to make the right choice for their individual circumstances.
“Older borrowers who may have wanted to repay their borrowing ahead of retirement should also build their understanding of the range of later life lending products available. Lifetime mortgages are more flexible than ever and with the ability to serve interest, make ad hoc repayments and rebroke in as little as four years, there are far more options than people may realise.”
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