Equity release interest ‘drops off cliff’ in face of 8% rates 

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Equity release interest ‘drops off cliff’ in face of 8% rates 
Chris Ratcliffe/Bloomberg

Advisers have reported a significant drop in equity release business as clients hesitate to lock into deals at 8 per cent interest rates in the hope they will come down.

Despite residential mortgage lenders cutting their rates back closer to 5 per cent in recent weeks, equity release products have remained around 8 per cent. 

Lenders are also loaning less on equity release products because their no negative equity guarantees mean if prices plummet - which they are expected to do by anywhere from 10 to 30 per cent - there is more risk involved.

Jane King, chartered adviser for Ash Ridge Financial Services, said her equity release business “has dropped off a cliff”.

She added: “Nobody wants it at those rates. They’re taking a ‘wait and see’ attitude.”

Advisers said they have been quoted rates by lifetime mortgage lenders anywhere between 6 and 8.5 per cent, depending on the loan-to-value.

If house prices fall over the long term, some borrowers may find themselves in negative equity.Jane King, Ash Ridge Financial Services

The average rate this month on equity release products is 8.13 per cent, according to Moneyfacts.

Rachel Springall, finance expert at Moneyfacts told FTAdviser a number of lifetime mortgage products have been withdrawn in recent weeks.

“We hope this will be a temporary measure amid interest rate uncertainty,” she said.

David Penney, director and chartered financial planner at Penney, said he has discussed equity release with clients. 

While he does not provide mortgage advice, Penney does discuss options with clients.

“At 8 per cent plus, the issue for me is the rate. It’s a difficult one - will people regret locking in at 8 per cent if rates fall next year? Or might they end up at 10 per cent next year if rates increase? 

“We always tell people not to time the market, but I’d be inclined to wait and see.”

One of the main reasons Penney’s clients are weighing up equity release is that they want to give money to their children now while they need it, versus in years’ time.

This reason for equity release grew following the pandemic, though home improvements are still the most popular reason.

Some clients in less favourable positions are using equity release to help them pay energy bills and fend off repossession.

Lenders have seen their equity release arms multiply this year against a backdrop of rising rates.

This week (November 9), Aviva said the value of its new equity release business had grown nearly seven times in the first nine months of this year compared to 2021.

This growth does not take into account the rate rises, which took hold in October following former chancellor Kwasi Kwarteng’s ‘mini’ Budget.

While the value of loans on its books will increase, the lender - like many others offering lifetime mortgages - could see new business stagnate if clients are hesitant to lock in such high rates for life.

Negative equity risk

As well as clients struggling to stomach 8 per cent rates, advisers are finding that lenders are tightening their valuations of properties, which is leading to some of their mortgage deals falling through.

If a valuer down values a property - in other words, values the property at less than the asking or estimated price - then a lender will likely shrink the size of the loan on offer to the client.

“They may be concerned about lending at all time high valuations bearing in mind they offer a no negative equity guarantee,” King explained. 

“If house prices fall over the long term, some borrowers may find themselves in negative equity over the long term due to interest roll up.”

Richard Bishop, managing director of PFEP Wealth Management, said where he works in Wolverhampton house prices have already dropped by 1 per cent.

“We'd expect to see a further 4 per cent by the first quarter of next year,” he added.

“Equity release and valuations are a problem for younger borrowers aged 55 to 60, as the valuation of the property is crucial. The amount lenders will lend is a percentage of the value, and for younger borrowers the percentage is much lower.”

Down valuations have been affecting the whole mortgage sector, not just equity release. 

It’s also worth noting that most lenders have lent more than they planned this year, so they are in no rush to offer great deals right now.David Forsdyke, Knight Frank Finance

Brokers have reported cases of surveyors knocking off as much as £150,000 from properties' asking prices.

Now valuers are predicting the number of disputes over property valuations to increase as the market braces for less up-to-date data due to a slowdown in UK property sales.

David Forsdyke, Knight Frank’s high-net-worth equity release boss, said with equity release rates having increased and loan-to-values having reduced as a result, lenders are being “much more cautious at the moment”. 

He added: “It’s also worth noting that most lenders have lent more than they planned this year, so they are in no rush to offer great deals right now. Canada Life has stepped out of the market completely, but I expect they’ll return in the new year.”

While Forsdyke said his business continues to be busy, his firm’s advice is to wait until rates settle.

“I’m confident they will in the new year. For those with immediate needs we are continuing as normal,” he said.

“I think the market will naturally slow between now and year end, but the need for equity release and other forms of later life lending is steadily increasing, so I think the long term forecast is positive.”

ruby.hinchliffe@ft.com