Inflation and Rising Interest Rates: What Does That Mean To The Equity Release Market?
This week’s podcast is all about inflation, rising interest rates and what that means for the equity release market. Craig is joined by resident Equity Release Advisor, Mark Thompson.
A lot has been happening in the UK recently: changes within government, inflation, interest rates, a mini budget, a u-turn and another mini budget. There’s also been another change in the Bank of England base rate. So what does it really mean for the equity release market?
Does equity release follow the standard residential mortgage market in terms of rate rises?
The easy answer is yes, it does follow the rates generally. Things have certainly been changing rapidly of late, although it looks like it’s beginning to settle down. Rishi Sunak being announced as the new Prime Minister has helped.
Rates have definitely gone up, but we need to remember that rates were so low. They couldn’t sustain forever. Those of us that are old enough recognise that these rates are nowhere near as high as they were several years ago. They’ll hopefully settle down now and possibly move backwards again. The Bank of England does influence that a lot and if they start hiking rates it will be interesting to see what happens.
Mortgage rates are coming down again yet that’s never shared in the press. It doesn’t make headline news. But it’s certainly good for the mortgage market and homeowners.
The Bank of England base rate should have been changed by the time this podcast is released. There was speculation it’s going to go up by 1%. That was what the analysts said before we had a new Prime Minister and new Chancellor in place.
How does the equity release market differ from the standard mortgage market?
All mortgage providers are essentially money lenders and they are heavily focused on the cost to them of lending. That’s impacting the government as well, in terms of the cost of borrowing. It’s also affecting the economy overall.
The major difference between equity and normal markets is that while interest rate is relevant, you don’t choose equity release because of the rate. You choose it because it’s a necessary solution to your life problem or the way to achieve your goals. But it is relevant, and it may put some people off borrowing.
Average rates have gone up by 2% or 3% recently. If you’re considering borrowing money as a gift to family or for a holiday, you might now think twice if that’s going to cost you 6%, 7% or 8% interest. But if it’s to replace an existing mortgage that’s coming to an end, where the only other option is to move home, you don’t have a choice.
Equity release was always intended as a last resort. That makes it sound like a bad product, and I never liked that phrase. But with all equity release customers, we always consider why it’s needed and whether there are any other avenues to consider.
In many cases, equity release is the only solution. In which case, the rate is essentially irrelevant. What it does is impact on what’s left in the estate for beneficiaries at a later stage. So a rate change with equity release can have serious implications – but that’s also true with a regular mortgage.
Are the changes in the market affecting the number of products on offer?
This is another key difference. With a standard mortgage, you go to a Building Society and they lend you the money. With equity release, there’s a lot of investors behind the scenes that are actually providing the funds. So there are different products depending on the requirements of the different investors.
There are hundreds and hundreds of products because a lot of people are investing in equity release. That’s what complicates things slightly when you’re looking at rates or products. Some investors might pull the plug on a particular product because they’ve decided not to invest at this particular time in the market.
That doesn’t mean to say there are no other products out there. They are simply coming and going. Recently there has been a suspension of certain products, but there are still hundreds in the marketplace. Equity release is still thriving.
The products that have disappeared will come back as soon as those investors take stock of the markets, decide on a rate and how they want that product to be tailored. It’s slightly different to the normal mortgage market, but there are similar results in the end with rates going up or down and products being withdrawn and reintroduced.
Are equity release products still as popular?
Recent research from the Equity Release Council shows that numbers have grown substantially. It reported that over £1.7 billion of lending was released in the last quarter (July to September). It’s a very strong, growing product because, as we’ve said, people need it and sometimes it is their only option.
I’m still coming across many new clients. It’s mind blowing how everything’s been going up in price, with inflation running at 10%. There are still forecasts for it to go above that. It means our money is worth less and everything’s costing more. Energy costs are going through the roof.
It’s very painful for people on the financial borderline. I come across a lot of people regarding equity release who have very expensive properties and yet have no money. They have insufficient pensions, everything’s gone up and they are now struggling to make ends meet.
One of the solutions to that is of course to move. But where to? I’ve got clients who say they have been looking for two years and can’t find one a home they like in the right location. They can find a house, but it’s not what they want – putting them between a rock and a hard place.
That’s why the equity release market has had a record year. That will continue. Even though rates are going up, the need for it is increasing too. Your main capital investment is your property – it’s an obvious route to help you get out of a hole, to survive or to maintain your lifestyle.
Can I still minimise the impact on my estate?
While we don’t like rates going up from a customer’s point of view, our job is to try and get them the cheapest deal. We can make sure your equity release product minimises impact on your estate.
In a lot of cases, that doesn’t actually matter to the client, especially those that don’t have beneficiaries. The rates are less relevant then – these clients just want to enjoy the rest of their years.
An important aspect to all this is the price of properties, and particularly over the last two years where the rise in property prices has been phenomenal. That means a big boost to the income generated from an equity point of view.
So we shouldn’t just look at rates alone, we need to look at everything else that’s thrown into the mix. Your property is your biggest asset – and it’s also your home. You can use the money that you’ve made to live as you want to.
We’re also finding that customers are releasing money to help their children cope with the cost of living, such as paying off credit cards and secured debts. Another common approach is to support their children with a property deposit to help them live where they want to live.
While we all want our children to stand on their own two feet, this is a very unusual time. It’s not what’s happening, so much as the speed it’s happening. Energy has gone up so quickly, inflation has risen so fast and now interest rates have gone up. We have to react and do what we can to support each other.
Is equity release a good way to pay off debt?
I read an article recently where an expert explained that lenders were lending less to people in debt. So people looking to consolidate debt, paying off mortgages or whatever now couldn’t get the borrowing they wanted because of cost of living increases.
Yet the lenders I’m speaking to recognise that people are in distress and that they can provide a solution. The minimum people can usually borrow with equity release is about £10,000, but you can also take a drawdown facility or ‘reserve’, to have additional money on standby.
At the moment, it’s estimated that about 40+% of people on pensions are actually in negative finances at the end of the month. That’s a horrific statistic. If people are in that sort of financial distress, it’s good to know they can have a facility to take the money as and when they need it.
How this is particularly relevant is that you pay the interest rate that applies when you take the money, not the rate today. So if you borrow £10,000, it might cost you, say, 5% for £10,000 at the moment. But you could have a £200,000 reserve facility, where you pay the interest rate as and when you take it. If you take it further in the future and rates have dropped, you might take it at 4%.
The beauty of the drawdown is that you take the money when you need it. It means that if you need to make ends meet or the car’s broken down or the boiler’s blown up, there’s an emergency fund. You don’t pay any interest on the reserve until you take it out.
Are there any other costs if you have a drawdown reserve?
In the old days, a lot of the lenders or providers would actually charge an enhanced commission to set up a reserve. Imagine you were borrowing £20,000. That might cost you 5%, but setting up a £150,000 emergency fund in the background might mean you pay 5.5% for that initial lump sum.
That used to be the case. But the Financial Conduct Authority was worried about people being encouraged to create drawdown facilities and paying a higher rate for their initial borrowing. Now, the lenders are no longer penalising drawdown in that way.
If you take the £20,000 today it’s at 5%, and if you want the £200,000 reserve there’s no additional charge. A recent client of mine actually got a cheaper rate because they took a drawdown. It shows that the market is reacting to the way drawdown facilities are charged.
You still pay the rate at the time you take the money but now, there’s no damage in taking a drawdown. It means you can have a safety net. How nice to spend your last years in life knowing you have security.
A lot of younger people are panicking because they don’t have that fallback. It’s nice to see clients move from a state of distress about price rises and not being able to afford to go out, to suddenly regaining their freedom.
Why is equity release so important as we grow older?
Once you reach a certain age in life you can’t just take a second job, work extra hours or overtime to boost your income. Equity release can give you absolute peace of mind and security.
In my experience, most people are fairly frugal with money as they get older. I saw a lovely lady last week. She’s getting on now, living on her own, she’s lost both her children. She’s living in a house that she doesn’t want to leave, but she’s got no heating upstairs and she’s not got a proper bathroom.
Equity release can just enable her to put the heating on upstairs and get a walk in shower. She’s losing her sight and it’s only going to degrade further. At the end of the day, she’s got a life to live and she doesn’t have to go without heating on the first floor.
In this podcast we have covered inflation and the equity release market. The podcast was released in November 2022. As always, things do change. The information shared is correct at the time of recording.