Equity Release  

How has lending on equity release changed?

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How equity release has evolved

Mr Hale says: “Indeed, some products are now available at under 2.5 per cent fixed for life. This, alongside the innovation we have seen on features, is great news for advisers and customers.

“The age of the borrower and the amount they wish to borrow relative to their property value impacts the interest rates available.   

“As with any form of lending, low interest rates are always a desirable feature but a plan should not be recommended based on interest rate alone.”

Government lending

Another big factor, perhaps the biggest, according to Andrew Morris, senior equity release adviser at Age Partnership, is the fall in long-term government lending rates which is enabling lenders to offer lower rates.

“Seven to eight years ago, [equity release interest rates] rates were 6-7 per cent and are now around 3 per cent. I would probably say that 3 per cent of that drop is owing to long-term government lending and up to 0.3 per cent is competition.”

According to figures from Equity Release Council, the equity release product rate sat at 4.48 per cent in January 2020, while two in five products offer rates of 4 per cent or lower. 

A number of products have emerged with rates of 3 per cent or lower – which is less than half of the market average just four years ago. 

Loan to value is also driving down the interest rate on equity release mortgages, with rates having come down across the entire LTV spectrum. 

Rule of 72

As explained further by Mr Wilkie, the ‘rule of 72’ dictates how long it takes for the loan amount to double. If the rate is 2.3 per cent, it will take just over 31 years for the loan to double in size. 

Compare that to a rate of 6 per cent which doubles every 12 years, and it is not hard to see why demand has shot up as rates have come down.

The difference between, for example, a 6 per cent and a 3 per cent rate can result in saving tens of thousands of pounds for consumers over the lifetime of the loan. 

Jim Boyd, chief executive of Equity Release Council, adds: “Importantly, these lower rates have appeared without compromising on consumer protections and have helped to prompt more customers to put their misconceptions to one side and consider equity release as an option.”

Lenders might have a lot of money to play with, but they will still need to manage the risks where the loan value outstrips the value of the property.