Home equity release: what the experts say

Market weathervanes

Reading the runes of UK monetary policy is notoriously difficult, said Stefan Wagstyl in the Financial Times. But there’s “a clear sense” that the era of ultra-low interest rates is on the way out. Even though the top mortgage offers of high-street lenders like Halifax, Nationwide and Santander “have barely risen since the summer” (all are offering five-year, fixed-rate loans at 0.99% for up to 60% of the property value), it can’t last much longer.

Indeed, lenders have already raised rates on equity release mortgages, “which are something of a market weathervane as they often involve very long-term loans”. The lowest rates on these products have jumped from 2.4% a few weeks ago to 2.8%. “There’s no need to panic” – rates were much higher pre-Covid, at 3.5% or more. But it may pay to start thinking about a new deal.

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Blessed release?

Over the past decade, equity release products, which allow the over-55s “to tap into the value of their home”, have boomed, said George Nixon in The Times. There are currently 812 loans available, with an average rate of 4.17%. “Most homeowners choose a lifetime mortgage, either taking one large lump sum or releasing money in stages.” The interest is typically added to the debt and repaid when the borrower dies or the house is sold. These schemes can vastly improve people’s quality of life. The catch is that higher rates “make a huge difference” to the amount eventually repaid. A £200,000 loan at 6.82% (the going rate in 2011) would nearly double to £394,802 after ten years – leaving many heirs with a nasty surprise.

ERCsome charges

Unlike “normal mortgages”, there’s “no fixed-rate period that expires” in home-release schemes. But you can still shop around for a better deal. The big caveat is “steep early repayment charges” (ERCs). It’s crucial to “run a calculation to establish how long it will take to reach break-even point”, says financial adviser Abigail Banks of Private Office. “Sometimes the difference in rates does not outweigh the charges.” Borrowers are required under FCA rules to take financial advice before taking out an equity release loan. It’s a good idea to have “a frank conversation” with the family too.