Fluctuations in the market are to be expected, no matter what sector. In fact, these trends have been seen throughout history.
They can either be a boon or a bane. It all boils down to how we interpret the trends that take us to where we are. Either we ignore them and lose a window of opportunity, or we look into them and see how we can benefit.
Let’s discover what falling equity release interest rates mean for us, the market, and our future.
Are Falling Equity Release Rates a Cause for Concern?
Homeowners that want to release money from their house can now do so at extremely competitive equity release interest rates. With the lowest interest rates we’ve seen in decades, equity release works even better.
According to the Equity Release Council, equity release rates hit an all-time low in 2020. There are many equity products on the market, and more than 50% of them are now offering rates lower than 4%. Some are even as low as 2.6%. Even though 2021 has seen a slight increase, it remains low compared to previous years, around 6%1.
The Pros of Low Equity Release Interest Rates
When it comes to lifetime mortgages, which is the most common type nowadays, you don’t have to make any repayments if you don’t want to. The loan, plus interest, will be paid back from the sale of your home when you pass away or move into permanent care.
If you’d like to make repayments before the end of the loan period to decrease the loan amount, the interest that would inevitably build up during the loan won’t be as high as it would without making extra repayments.
If that’s not you…
Making the repayment at the end of the loan term is better now that the interest rates are low. The interest build-up will be less than in previous years, where interest rates used to be more than 5%.
Equity Release – A Great Way to Borrow Extra Cash
Compared to other loan options, equity release has become a great one. Traditional borrowing isn’t so high on the charts anymore because equity release has taken the lead as the UK’s mainstream financial solution.
More than 400 equity release products were sold in January 2020 alone, according to the ERC2. So, when you’re 55 years or older and need some extra cash by releasing equity from your property or home, there are many options for you.
Before deciding on an equity release product, you need to consider your interest compounding and find the best features that are right for you.
4 Great Features of Equity Release
1. Downsizing Protection
You can repay your loan without early repayment charges. This usually happens when you want to sell your current property and move to another in the future.
2. Interest Repayment
Look into your provider and plan: some allow you to make once-off interest payments at the end of your loan period, early repayments or part-interest repayments.
3. Loan Repayments
Around 50% of the ERC products have on offer allow you to make partial repayments on your loan without early repayment charges. This is great for decreasing the total end cost.
4. Drawdown Reserve
Drawdown lifetime mortgages allow you to take out an initial amount of cash. You will also be allowed to make an account reserve of more money to draw down in the future. Better yet…
You won’t be charged interest on that reserve until you take that money out. This is great for managing compounding or accruing interest.
So, what’s next?
Well, to understand what a lifetime mortgage is, it’s advised that you chat with your trusted financial adviser about it to get the full scope. Make sure it’s a fully qualified equity release adviser who knows the current interest rates, house prices and borrowing costs.
3 Important Things to Consider BEFORE Getting an Equity Release
1. Get Professional Advice
Are you thinking about releasing equity from your home? It’s a big deal! So it’ll be good to ask a professional for some equity release advice before jumping into it.
You can go online to find advice if you don’t already have a financial adviser. Simply book an appointment online; there are hundreds of advisers nationwide. The adviser should get the best plan for you and outline how much you’ll get, how much you’ll spend, and what you’ll end up with.
Without an adviser, you won’t be aware of the effect equity release might have on your means-tested benefits3 entitlement.
2. Don’t Release More Than You Need
The rates you’ll pay on the equity you release will increase the closer you get to your maximum borrowing limit.
Currently, the highest rate for the maximum amount is 6%. But, if you take out 75% of your maximum, your rates will most likely be 3% or less. And then, if you take out 60%, you’ll most likely qualify for 2.24%. This, of course, will depend on the company you choose. For example, the Key Equity Release currently has one of the best rates.
But what about traditional mortgage rates?
Well, even though traditional mortgage rates are between 1-2%, equity release rates are fixed for life, making it a better option in the long run.
3. Release Money Only When You Need It
As you probably know, drawdown plans and income plans let you draw down against a pre-agreed facility. Drawdowns allow you to choose income plans and set your income amount from the get-go.
Even though they tend to be more rigid, there’s more certainty attached to income plans because you set the rate at the beginning of the agreement. On the other hand, drawdown rates are only applied when you release money. Plus, each drawdown comes with another application.
Discover: The Pros and Cons of Equity Release
Let’s Have a Quick Look at Some Stats
Thanks to the ERC (Equity Release Council), you can now have an informative report to help you decide whether you should consider an equity release or not. According to their Autumn Market Report, 50% of equity release products offer rates lower than 4%. 20% of equity release products offer rates lower than 3%; some are even as low as 2.6%.
Best of all!
Equity release has the lowest interest rates of any personal form of borrowing money, including mortgages, personal loans, credit cards, and even overdrafts.
July of 2019 saw a 29% increase in equity release product sales. This resulted in an 88% rise during the first 6 months of 2019. Even though those numbers decreased slightly by mid-2020, the rates remained low after the 5% sales decline due to the pandemic.
Speaking of COVID-19…
Because of the pandemic that hit the world in 2019/2020, equity release customer activity decreased by 14% at the beginning of 2020. But, the ERC also noted that recovery has been taking place since June 2020.
The Market Report clearly shows how providers have supported customers during the COVID-19 pandemic, with rates at an all-time low and providers ensuring flexible products.
Got Questions? Check These First
Are Equity Release Rates Falling?
Yes, compared to earlier years, it’s at a historic low of under 3%!
What's The Lowest Interest Rate For Equity Release?
2.24%, according to the ERC report. The Market Report clearly shows how providers have supported customers during the COVID-19 pandemic, with rates at an all-time low and providers ensuring flexible products.
What's A Typical Interest Rate For Equity Release?
The typical rate used to be around 5%, although most rates are now under 4%, thanks to COVID-19 and competitors’ rates.
Equity release can be hugely beneficial. Historically, if we look at it, low equity release interest rates and increased interest compounding have resulted in positive financial returns.
Before you decide to unlock the equity tied in your home, you must be aware of all the pitfalls. In addition, speak to your financial adviser to find out which product would be best for you and your family.