Homeowners facing high levels of debt and inadequate pension savings are turning to borrowing against property value in later life, according to the Equity Release Council’s Autumn 2023 Market Report.
High levels of debt and a lack of pension savings make it “increasingly likely” that homeowners will need to borrow against the value of their properties in later life to make ends meet.
The Council report explores the impact of higher interest rates on the lifetime mortgage and wider mortgage market during the first half of 2023. It shows regular and one-off capital repayments across the mortgage market have totalled more than £21 billion per quarter since Q4 2022, according to official data, up from £17 billion before the pandemic.
The total UK mortgage debt remained at £1.63tn in mid-2023. Despite this, the average home contains equity of £222,526 – significantly more than the average pension.
What’s more, among older homeowners already using lifetime mortgages to release equity from their homes, the Council’s data shows a shift in borrowing patterns during H1 2023. Compared with a year earlier, the average new lump sum or drawdown lifetime mortgage customer withdrew a smaller amount of money and a smaller percentage of their overall housing wealth.
The Council’s data also shows customers continued to use the flexibility of voluntary penalty-free partial repayments when they can afford to. The average partial repayment was £2,527 in H1 2023.
If a new customer with a loan of £100,000 made this repayment every year over a 10-year period, they would reduce their borrowing costs by £37,845. Over 15 years, they would save £69,305.
All products that meet Council standards allow new customers to make voluntary partial repayments with no early repayment charge (ERC), typically up to 10% of the loan per year.
Ten years ago in 2013, the average lifetime mortgage rate was almost 3% higher than the average fixed rate residential mortgage. For most of 2022, the gap was more than 1.5% compared with the average two-year or five-year fixed rate mortgage.
Over summer 2023, this rate gap fell to less than 1% versus five-year products and less than 0.5% versus two-year products. While the trend reversed slightly during September 2023, lifetime mortgage rates have remained more competitive in relative terms than they were a year ago.
David Burrowes, chair of the Equity Release Council, said:
“While mortgage pricing has jumped across the board, lifetime mortgage rates have weathered the storm better than some residential mortgages. The security and flexibility enshrined in Council standards include the ability to make voluntary partial repayments without the threat of their home being repossessed if repayments become unaffordable.
We are completely focused on ensuring that customers receive the right advice at the right time so they can make well-informed decisions, in line with the Consumer Duty. No-one should turn a blind eye to equity release as an option for their later life financial planning, and it’s important they work with Council members to weigh up its practical benefits against all potential alternatives.”
Commenting on the report, Craig Brown, CEO, Legal & General Home Finance, said that the current climate has created a “degree of caution among borrowers”. He added:
“But, thankfully, the lifetime mortgage market has evolved and now offers greater flexibility, so that homeowners can access the value tied up in property, while managing repayments over the life of their loan. Legal & General Home Finance led the way with our Optional Payment Lifetime Mortgage, allowing customers to pay the interest on their loans through a regular monthly direct debit, and this remains a popular choice with customers.”
Stephen Lowe, group communications director at retirement specialist Just Group, said that the report shows how the equity release market has experienced a “major reset” which is “not surprising” when the Bank of England’s interest rate is considered. He continued:
“Against that backdrop, sits the question of whether the market has hit a stable level from which it can grow. We have started to see the number of new plans agreed each month trend upwards and providers responding by increasing the number of new products available.
Looking longer-term we think that there are important fundamentals that will help drive business growth. The Council highlights the fact that there are large numbers of people – government figures estimate 53% – due to retire by 2030 whose income is likely to fall short of the ‘Moderate’ Retirement Living Standard calculated by the PLSA.
Accessing the wealth locked up in a home in later life can help provide an income boost to this group. It can also help those reaching retirement with debt, and wealthier people caught up by the freezing of Inheritance Tax thresholds. Modern lifetime mortgages can be a powerful solution to a range of consumer needs and should be considered as part of later life financial planning.”
NOTE: We claim no right or title to this article which appears in Todays Wills & Probate dot co dot uk. Author acknowledged as Katie Johnson.
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