‘My client released £6k equity from their home to pay energy bills’

Jan Johnson, director at 55 Plus Equity Release, told FTAdviser she has seen markets like this before, but “not quite at this level”.

Starting out in 2005, Johnson said she remembers the highest interest rates reaching 8.5 per cent. But today, the highest rates she is seeing have exceeded 9 per cent.

After the financial crash, Johnson set up her advisory business in an effort to help guide people out of financially precarious positions. Now, she is experiencing another wave of such clients.

“Due to the cost of living crisis, I’ve had people wanting to take money out to pay for their energy bills,” said Johnson.

“A lady drew £6,000 out because she was terrified of turning the heating on. You don’t want an elderly person sitting in a cold house all winter. We do try to look at other options first, such as family.

“Often, we only hear about drawdowns when the money has been released. We have spoken to lenders in the past asking to be involved in this to make sure it’s the right thing for the client.”

When a client releases equity by drawing down from a lifetime mortgage, they may or may not have a drawdown facility in place. 

If they do, they have to pay a new interest rate on the amount they draw down.

Current interest rates, Johnson said, have not prompted a lull in clients drawing down. Rather, the reasons for drawing down are shifting from luxury to survival.

In lockdown, clients released equity from their homes to help their children - many of which moved back into their parents’ during the pandemic - to get on the property ladder. 

There’s less choice. It’s not a whole-of-market offering right now.Jan Johnson, 55 Plus Equity Release

When the world began to open up again, more luxurious reasons for drawing on house equity re-emerged, but this has halted again in the face of a worsening cost of living crisis.

“When you’ve got rates of 8 or 9 per cent, you’re more aware that you’re stuck with it for life,” she said.

Those without a drawdown facility who want to release equity have to set one up. When a client does not have a drawdown facility they have to apply for a further advance through an adviser, which can incur an additional cost. The rate on the further advance will be at the new rate

Johnson said in the last few weeks, lenders have been pulling drawdown products from the market.

“People without drawdown facilities haven’t been able to access their funds. And those with a facility are facing very high rates," she explained.

“There’s less choice. It’s not a whole-of-market offering right now.”

Between September and October, the number of lifetime equity release deals dipped 12 per cent, from 597 to 527 according to Moneyfacts.

Meanwhile, the average interest rate on a fixed lifetime equity release deal jumped from 6.03 per cent to 7.55 per cent between these two months.

This rate is around 1 percentage point higher than the average rate on a residential mortgage - which sits just below 6.5 per cent at present.

Repossession on the rise

One scenario Johnson is seeing an increase in is the number of clients facing repossession orders following monthly increases - by as much as £1,000 in some cases - on their mortgage repayments.

Between April and June, mortgage possession orders increased from 400 to 2,382 (496 per cent), warrants from 525 to 2,419 (361 per cent) and repossessions by county court bailiffs increased from 45 to 770 (1,611 per cent), according to the Ministry of Justice.

With interest rates having risen significantly, and with few lenders cutting them by much just yet, borrowers coming to the end of their mortgage terms are still facing big jumps in interest rate repayments.

While lenders such as Santander have said borrowers should look into extending their term length, lenders can be reluctant to do this for older borrowers - those aged around 65-70 - according to Johnson.

It’s either: get your home taken from you, or take an 8 or 9 per cent mortgage.Jan Johnson, 55 Plus Equity Release

“They aren’t extending mortgages [for this age group]. They’re switching them to new mortgages, and payments are going up. Some by £1,000 a month,” she explained.

“People are facing repossession in this circumstance. Quite a lot of them. In the past few months, we’ve had people coming to us in this situation at a loss as to what to do.

“It’s through no fault of their own. These are mostly self-employed people, who received no help from the government during the pandemic, who have missed payments.”

Once a borrower misses four payments on residential mortgage, a lender has to start proceedings against them.

“It’s either: get your home taken from you, or take an 8 or 9 per cent mortgage,” said Johnson.

In some cases, however, borrowers can use a lifetime mortgage to service the debt.

One client of Johnson’s is taking a lifetime mortgage offer to court in order to stop proceedings against them by a lender.

On a residential mortgage, lenders take income into consideration in determining the amount someone can borrow. With a lifetime mortgage, age and the property value are needed, but not income.

For 14 years, borrowers have enjoyed historically low rates. Many borrowers will have believed this to be normal, when it was anything but.Alan Lakey, CIExpert and Highclere Financial

The older a person is, the more they can release with a lifetime mortgage.

“If that figure matches what they owe, they can use this to replace the debt,” Johnson explained. 

“You can service mortgage debt, pay part of it, overpay it, or not pay it. We do get people who cannot release enough to repay that debt though.”

Comparing today to previous market crashes

A silver lining today which was absent back in 2008 is that advisers can better predict exit penalties for their clients.

Exit penalties used to be based on gilts, but now they are fixed with early repayment charges.

“There’s more chance of us getting them out of it. If rates are higher, exit fees are lower,” Johnson explained.

But there are also drawbacks to today’s environment. CIExpert and Highclere Financial founder, Alan Lakey, said the new problem the mortgage industry is facing is that unlike the previous hikes in 1981 and 1991, for 14 years borrowers have enjoyed historically low rates.

“Many borrowers will have believed this to be normal, when it was anything but,” said Lakey.

“Lifetime mortgages can solve the problem for some borrowers, as long as their loan-to-value enables them to borrow sufficiently.  

“Obviously the rates are much higher now, 8 per cent and the like, and as they are fixed for life with a minimum eight-year early repayment penalty period, they will likely find - in the short-term at least - that the amount owed outstrips house price inflation.

“Equity release is not a solve all product, but it can provide respite for many borrowers whose incomes are not sufficient or suitable for standard borrowing.”

The expected drop in house prices could have an impact on people taking money out of equity release products in future, Johnson predicted.

Credit Suisse has predicted they could fall by as much as 15 per cent, alongside a rise in unemployment. 

Morgan Stanley also said mortgage affordability “could be worse” now than it was before the great financial crash in 2008, despite lenders having underwritten loans at a “higher quality” since then.

First-time buyers have already seen the amount they can borrow dip by as much as 30 per cent in the year-to-date, as banks have tightened their mortgage affordability calculators in the face of rapidly changing rates.

ruby.hinchliffe@ft.com