Higher lifetime mortgage rates can make equity release seem less attractive, but the long-term drivers remain robust, says Chris Molyneux, lifetime mortgages development manager, Scottish Widows Bank

The fallout from the disastrous mini Budget hit the equity release sector hard – and the impact is still being felt.

As you know, the mortgage market experienced soaring rates in the last quarter of 2022, on the back of steady rises throughout the rest of the year. And rates are still rising.

With lifetime mortgages priced against gilts, they have been affected even more starkly than standard home loans.

It’s been a challenging time for the equity release market, but the long-range forecast is clear – this is a growing sector, underpinned by strong economic fundamentals.

Rate rises

The average equity release rate stood at 4.17 per cent in October 2021, according to Moneyfacts. By October 2022 it had rocketed to 7.54 per cent.

Over the same time product availability dropped by 35 per cent.

Lending volumes inevitably dipped as a result. In the last three months of the year there was a 20 per cent fall in lending compared to the third quarter, said the Equity Release Council. This was followed by a further 19 per cent fall in the first three months of 2023. Loan sizes also fell to a six-year low of £61,785 in quarter one – down 34 per cent year on year.

Confidence was shaken among some older homeowners, who were understandably wary of taking out a loan on which interest will roll up and increase the debt more quickly than they’d expected.

For example, last year we roughly expected the borrower’s debt to double every 13 years. That changed to doubling every nine years, which has a massive impact on potential overall costs and the attractiveness of these products.

Despite the difficult end to the year, 2022 wasn’t all doom and gloom. Overall lending for 2022 was 23 per cent higher than 2021.

Plus, interest rates calmed in the first few months of 2023. By the start of April 2023, average equity release rates had fallen to 6.26 per cent and there were 232 products, said Moneyfacts.

Of course, recent economic news has again impacted pricing, and we’ve seen rate rises. It’s harder than ever to predict what will happen to interest rates over the next 12 months.

But it’s not just rate rises affecting the lifetime mortgage sector.

More than rates

We’ve also seen maximum loan to values (LTVs) tighten since last year, which negatively affects the amount that clients can take out of their property.

For example, we’ll now lend up to 19 per cent to someone aged 55, which is down from 25 per cent at the start of October 2022.

Up to 65, our maximum LTV is 29.2 per cent, down from 36 per cent and at aged 85, we’ll lend up to a maximum 44.5 per cent LTV, down from 56.5 per cent.

We’ve seen this change across the board because lenders are being more cautious. We’ve got to take into account higher interest rates and potentially lower house prices.

Lifetime mortgages rightly come with a no-negative equity guarantee to protect the borrower. Lenders need to avoid potentially losing money because of this guarantee. Higher rates combined with falling prices could mean the total amount owed overlaps the value of the property.

That’s why we’re seeing a tightening of max LTVs.

What can brokers do?

The current market is a reminder that lifetime mortgages are based on multiple linked factors, including rates, house price expectations and of course the client’s age and property value.

These are outside of the client’s control, but they can consider timing when they take out a product if they understand how different factors affect the pricing of lifetime mortgages.

For example, those who decided to wait six months ago probably made the right call, but it might not be sensible to keep waiting. If house prices move down further, your client might find they can’t release the sum they want from their property.

Explain the different variables to clients, so they can consider what would happen if rates were to change, as well as if their house price lost or gained significant value.

The good news

Equity release advice has become more complex in the last six months. Higher rates, lower LTVs and potential house price falls have led to lenders changing their criteria and rates.

Brokers need to stay up to date with these market and product movements and consider the impact on costs and the amount that can be released.

The good news is that the long-term indicators and growth potential are strong.

You already know the reasons.

Older homeowners have over £1.2trn in property wealth. Many don’t have adequate pension provision to fund their later years, particularly women, as we explained in How equity release can support women in retirement. At the same time, we have a growing older population meaning more people will spend longer in retirement.

The lifetime lending sector is only going to get bigger, as homeowners increasingly use their property wealth to live comfortably in retirement and make decisions about financially supporting children.

Equity release doubled in the last five years to reach £6.2bn in lending in 2022. It remains a hugely important sector for your client with obvious growth potential for your business too.

For the use of mortgage intermediaries and other professionals only. 

This information is correct as of May 2023. The information contained in this article is the property of Lloyds Banking Group plc and may not be reused or publicised without our prior permission. The information provided is intended to be for information only and is not intended to be relied upon.

If you do not have professional experience, you should not rely on the information contained in this communication. If you are a professional and you reproduce any part of the information contained in this communication, to be used with or to advise private clients, you must ensure it conforms to the Financial Conduct Authority’s advising and selling rules. Scottish Widows Bank is a trading name of Lloyds Bank plc. Registered office: 25 Gresham Street, London EC2V 7HN. Registered in England and Wales, no. 2065.Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority under number 119278.