How Will Rising Interest Rates Affect the Short Term Future of the Equity Release Market?
This is the second in a three-part series of collaborative posts about equity release. This article looks at the likely effect of rising interest rates on the equity release market.
The equity release industry is booming. Homeowners from across the UK may find the financial freedom they desire by unlocking one of these attractive products.
If you’re a homeowner over 55 and haven’t heard of equity release, you need to do your research. These products allow you to access cash tied up in your property for any purpose you wish. No tax is payable on this money, and you will never be obliged to move out of your home.
John Lawson from SovereignBoss has done extensive research on the future of the equity release interest rates. He has discovered that after reaching an all-time low in March 2021, equity release interest rates are rising. The big question is, how significant will the rate increase be, and will this have a short-term effect on the industry as a whole? Let’s take a look at what Mr Lawson has to say.
Table of Contents
Interest Rate Increase
When interest rates rise, the equity release sector is inevitably impacted as well. In March 2021 interest rates hit a historic low, with some homeowners having the opportunity to unlock equity with fixed rates as low as 2.3%. This unprecedented rate drop was exciting because it wasn’t much more expensive for a homeowner to opt for an equity release than it was to have a traditional mortgage. Plus, with no repayments required in one’s lifetime, retired homeowners could save a fortune by eliminating monthly mortgage payments. (1)
Recently interest rates have increased slightly but are still quite low. Current rates range between 2.9% and 6.4%. The interest rates you achieve will be lender-dependent, but they will also be determined by your age, health condition and property value.
Experts predict that interest rates are set to rise until 2024. And with the latest announcement by the Equity Release Council (see below), now could be the cheapest opportunity to access the cash tied up in your property through an equity release mortgage.
New Compulsory Optional Repayments
In addition to interest rates rising but still being stable, on 31st March 2021, the Equity Release Council enforced guidance on lenders to offer all their lifetime mortgage clients the option for penalty-free voluntary repayments. This means that homeowners can now repay up to 40% of the amount borrowed each year.
The exact offer you receive will depend on the lender you select. But in principle, if you have the means to do so, you could pay off your equity release plan within three to 10 years, restoring your property’s value.
But that’s not all. Once you’ve released equity, there is no risk of foreclosure. You can stop and start making repayments whenever you wish. Voluntary repayments are a great idea if you can afford them, as they reduce the overall cost of your loan by preventing compound interest.
So How Badly Will the Industry Be Affected?
With interest rates still reasonable and the above announcement by the Equity Release Council, the industry is set for another record-breaking year. Eighty percent of experts agree that the industry’s value is rising, and we at Sovereign Boss are excited to see further innovation from lenders and the Equity Release Council.
In Conclusion
Whether now is the best time to opt for an equity release product is very personal. You will need to consult a financial advisor who will help you determine the best course of action for your needs. If it’s in your interest to unlock equity at this stage, however, you’re likely to find a fantastic deal, with product flexibility better than ever.
So, while interest rates are rising, they’re not too much of an issue at this stage. And there is certainly no indication that there will be any short-term impact on the equity release industry. On the contrary, we are set for another record-breaking year.
That being said, it’s too early to predict the long-term impact that interest rates increase will have on the industry. But SovereignBoss considers it their responsibility to keep you updated with the latest industry trends.
This is a collaborative post.