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Equity release mortgage rates rise, as over-55s urged not to feel pressured by cost of living crisis

Rates on equity release mortgages have risen by almost half a percentage point in the last year, driving them up from previous record lows.

Every equity release lender except one, OneFamily, has increased its rates since the beginning of 2022, according to financial information service Moneyfacts.

The typical rate on an equity release loan is now 4.33 per cent, compared to 3.86 per cent a year ago.

More over-55s are taking equity release plans, but the cost of interest is going up

It is also higher than the pre-pandemic rate of 4.2 per cent in March 2020.

The rises are in line with the wider mortgage market, where rates have increased because the Bank of England has increased its base rate twice since December, going from 0.1 per cent to 0.5 per cent. 

Equity release, which sees over-55 homeowners access cash tied up in their home via a mortgage which does not need to be paid back until after they die or go into care, has experienced a boom in popularity in the past year.

Total lending in 2021 climbed 24 per cent annually to £4.8billion, up from £3.86billion in 2020, figures from the Equity Release Council show. 

The 2021 figure surpassed the previous record of £3.94billion set in 2018.

This was attributed to runaway house price increases, which meant homeowners had more equity to access from their homes, as well as lower interest. 

Not so long ago, interest on equity release loans could often be as much as 8 per cent.

The number of plans available has jumped accordingly in the last year, with a total of 665 now available according to Moneyfacts.

This was compared to 492 a year ago, and just 96 five years ago.

But with rates now increasing, homeowners considering equity release are urged not to rush into any decisions.

Rachel Springall, finance expert at Moneyfacts, also warned potential borrowers not to feel pressured into equity release because of financial strains caused by the rising cost of living crisis which may be impacting them or their families.

She said: ‘Taking a lifetime mortgage will impact inheritance and while some homeowners may feel pressured to make a decision amid rising interest rates and living costs, careful thought and planning is a must before they make any arrangement.

‘Rates charged on lifetime mortgages are rising this year, and this means unlocking equity out of a home may now be at a higher cost than if someone locked into a deal last year.

‘Seeking advice from an independent broker is not only wise to assess all the options out there, but also to ensure it’s the right choice for both the homeowner and their relatives.’

Lots of homeowners use equity release to allow them to help their families financially, but Moneyfacts' Rachel Springall says they should not feel pressured into doing so

Lots of homeowners use equity release to allow them to help their families financially, but Moneyfacts’ Rachel Springall says they should not feel pressured into doing so

Others said that increasing rates could serve to lower the appeal of equity release, instead encouraging older people to look at other options such as downsizing. 

Dominic Agace, chief executive of leading estate agents Winkworth, said: ‘There has traditionally always been a premium to pay for equity release, although with the base rate at a record low this premium seems less obvious.

‘However, now rates are set to rise, the premium becomes more evident as a margin above an increasing base rate and as the headline rate moves up to five to six per cent. 

‘Once this premium is incorporated,​ it will become more appealing for many to downsize instead of choosing the equity release route.’

The vast majority of borrowers with existing equity release plans won’t be affected by the rate rises, though it could impact those on drawdown plans who may pay more when they next decide to access some funds. 

Katie Brain of financial information service Defaqto said: ‘Most equity release borrowers will not have to worry about the increasing interest rates as they will be on a fixed rate of interest for the term of the plan, so there will be no change to the interest charged. 

‘For those borrowers who may have taken a drawdown plan in the last year or so, any drawdown requests are likely to be at a higher interest rate than the initial loan amount.

Brain also pointed out that, for the moment, there are still some low rates available, including the the Pure Retirement Sovereign Plan at 2.85 per cent for a lump sum and 2.9 per cent for drawdown. 

How does equity release work? 

Equity release allows homeowners to access cash from their homes tax-free

Equity release allows homeowners to access cash from their homes tax-free

Equity release, also known as a lifetime mortgage, allows homeowners aged 55 or over to access some of the money tied up in their property tax-free.

Borrowers get a loan secured on their home – usually up to 58 per cent of its value – and they remain the sole owner.

Once any outstanding mortgage has been paid, they are free to spend the money on anything they like. They can take the funds all in one go or in stages, depending on the plan they choose.

The money must be repaid from their estate once they die or go in to long-term care – although borrowers can now choose to pay some of the money back before then if they wish.

One concern when taking an equity release mortgage is the interest rates. As there are no mandatory monthly repayments, the interest is added to the balance of the loan every month or year and can dramatically increase the amount owed over a period of time.

Some borrowers therefore opt to make interest or capital repayments as they go, which will be allowed on all plans offered by Equity Release Council members from 28 March. 

Homeowners are also able to remortgage equity release loans in order to get a better rate.

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