As rising interest rates are undoubtedly having a profound effect on mortgage borrowers, lenders and customers in the equity release market are also feeling the impact.
The average two-year fixed mortgage rate hit headlines for reaching a 15-year high of 6.66 per cent in July; but the average lifetime mortgage rate had reached 6.74 per cent earlier in the first quarter of 2023, according to equity release adviser Key.
“Having worked in financial services for a while, I think it is vital we recognise that the low rates we have seen recently have not been the historic norm,” says Kay Westgarth, director of sales at Standard Life Home Finance.
“From 2004 to 2015, rates typically started with a six rather than a three, four or five of which we have seen over the past few years.
“As with other lenders we have had to increase rates, but we’ve worked hard to avoid pulling product ranges and ensuring that we give advisers sufficient time to submit applications.”
As Key notes in its latest market report, rates in the equity release market are not linked directly to the Bank of England base rate.
But the adviser adds that the "mini"-Budget, short-term housing market outlook and impact of the government’s efforts to manage inflation have hit consumer confidence and funder appetite.
The first half of the year saw a 48 per cent drop in the number of new plans and a 57 per cent drop in the amount of new lending when compared to H1 2022; although that period was the midpoint in a record-breaking year for the market, according to Key’s report.
“Some are choosing to take a loan but take less now, and maintaining a future drawdown facility as a reserve to enable further monies to be withdrawn in future, when needed, on a future interest rate,” says Andrew Gilbert, product director at Legal & General Home Finance.
“Some are choosing to hold off, perhaps in the expectation that product rates will reduce or to wait longer to reduce the time that interest on the loan will roll up.”
David Forsdyke, head of the later-life finance team at Knight Frank Finance, says he has seen demand fall for equity release. “In 2022 my later-life finance team saw more than 95 per cent of our business in equity release products.
“In the first half of 2023 that has dropped to 70 per cent, so we have seen a decrease in equity release.”
How are equity release providers faring?
Sadna Zaman, proposition development manager at Canada Life Home Finance, says it has been a challenging market environment for equity release providers.
“With gilt yields at elevated levels, it hasn’t been possible to offer the interest rates or loan-to-values that were available 12 months ago. Ensuring we offer fair value to our customers has remained our priority, and this has led to some difficult decisions.
“We withdrew our product range for a short period in 2022 and have limited the return of some product features and our highest LTV options, as we recognise that these are not sustainable with interest rates at their current levels.
“We have supported our existing customers by benchmarking additional borrowing rates to new business rates, but we’ve taken additional measures to make sure they understand the implications of borrowing at higher interest rates and the importance of limiting borrowing to what they need.”
Although the "mini"-Budget was in September, more2life managing director Ben Waugh says the impact was still being felt in the later-life lending sector more than nine months later.
“There is no getting away from the fact that rates have risen and customers are more cautious about borrowing, as they are concerned about what is happening with the cost of living crisis and inflation.
“However, we learned some really valuable lessons during the pandemic, and this has helped us to support customers as well as advisers in the current market.
“Communication is key and while changes to gilt rates have driven up interest rates on equity release, we do our utmost to ensure that advisers know exactly what is happening and when the application deadlines are.”
Equity release borrowers may not feel the impact of higher interest rates as quickly as standard mortgage borrowers, but Gilbert at L&G Home Finance highlights how the effect of compound interest rolling up on the loan is greater.
“We have worked quickly to provide additional personalised information to customers looking to take additional drawdowns on their plans, so they fully understand their choices and can clearly see how the interest will increase over time.
“In June we halved the minimum drawdown amount to £1,000. This is another product initiative we developed to support customers, and provide flexibility when customers need additional funds to ensure they can borrow what they need, reducing the impact of compound interest.
“In addition, we have recently increased the number of optional repayments that can be made for new flexible lifetime mortgage customers each year from four to 12, as well as allowing these customers to set up a monthly standing order to make smaller and more frequent partial penalty-free repayments.”
I think it is vital we recognise that the low rates we have seen recently have not been the historic norm.Kay Westgarth, Standard Life Home FinanceAccording to Gilbert, having the option to service interest becomes increasingly important in the current climate, and the market is expecting rates to remain high for some time.
But he adds that there are opportunities for continued innovation in the sector.
“For example, by considering contractual interest repayments for a period to enable higher loans, or looking at multiple later-life lending products in combination to meet wider customer needs.”
Indeed, Forsdyke at Knight Frank Finance, who notes his service was deliberately named ‘later-life finance’, says: “From the outset when we launched in 2019, we saw the need for broad borrowing advice for older homeowners, and that is really coming into play now we are in a higher interest rate environment.”
Chloe Cheung is a senior features writer at FTAdviser
