By Michelle Smith: Later Life Mortgage Advisor
I have been having many conversations of late with my client’s, explaining what has been happening in the equity release marketplace in recent months. As a result, I felt it would be useful to put my thoughts down on ‘paper’ and explain in a bit more detail, developments over the last 6 months.
In this article, I will cover some of the key events that have impacted the market, talk about interest rate movements, and try to give a view on what it all means.
The Numbers
As Lifetime Equity Release are members of the Equity Release Council (ERC), I have used some numbers from the ERC’s own data to show some of the key statistics that will help to highlight the size of the market currently.
2022 – Q2 ERC statistics
- 12,482 new plans between April and June
- Average new plan loan size £135,000
- 54% of new plans were lump sums
- £1.6bn property wealth withdrawn this quarter
2022 – Q3 ERC statistics
- A record 13,452 new plans between July and September
- Average new plan loan size £133,770
- 52% of new plans were lump sums
- £1.71bn property wealth withdrawn this quarter
As can be seen from the above numbers, the equity release market was, as predicted, growing at a good pace this was expected to continue into Q4 2022. The average interest rate on a typical plan was around 3.5%.
The results for Q4 of 2022 are not yet complete, however all reports indicate a significant reduction in the market (50%-70%) for October, November, and December). So, what has happened?
The Economy
As we all know, the UK and indeed the rest of the world, has been dealing with a significant economic challenge. The reasons for this have been numerous, starting with the lingering effects on delays in the international supply chain following the Covid pandemic, and the Russian invasion of Ukraine pushing up oil, gas, and food prices to name but two issues. These and other factors have driven up inflation with central banks across the world raising interest rates to try and bring it under control. Coupled with this there are already high levels of government debt following the Covid support packages and quantitative easing policies that were instigated in most of the major economies. Inflation hit a 40 year high due to these costs and economic factors.
The Mini Budget
With the ushering in of a new Government, we had the ‘mini budget’ delivered on 22 September 2022 which contained revised economic policies and tax cuts designed to encourage economic growth. However, it had a further detrimental effect on the UK economy and what followed was a sharp fall in the value of sterling, increase in cost of UK Gilts (Government borrowing) and a statement from the International Monetary Fund criticising the plans and downgrading of the UK credit rating. In short, the markets reacted very badly as the plans were ‘un-costed’ and this in turn drove up the cost of borrowing, both for the UK Government and members of the public in mortgage and loan rates and caused the sacking of the Chancellor and resignation of the Prime Minister. The one small ray of sunshine is that we have seen an increase in savings interest rates.
The Impact on the Equity Release Market
Positives first – For pensioners, who are the main category of customer for equity release, the government has confirmed the pensions triple-lock will remain in place and as a result a pensioner with full national insurance contributions on the new state pension will see an increase in state pension to £203.85 up from £185.15.
Followed by the negatives – Even though pensioners will see an increase in their income, there is a freeze in the income tax rates meaning many pensioners will be paying income tax for the first time.
Following the ‘mini budget’ many lenders cut the range of available plans and some lenders withdrew from the market altogether, the number of equity release plans available (not including Retirement Interest Only Mortgages) fell from 665 to just 150 in October 2022. For the plans that remained, interest rates increased significantly with the lowest rates available starting at around 6.5% and going up to around 10%.
The other key factor was the cutting of LTV rates, this means the ‘loan to value’ amounts which are how much you can borrow against the value of your property, were reduced. This was due to the concern that lenders and their funders had around what might happen to the value of UK property. This has been borne out by recent figures from Nationwide and Halifax who have both reported a fall in house prices.
Modern equity release has guarantees so a client who owes more than the value of their property at the end of the plan will not have to repay anything more than the value of the property (as a maximum) and any debt over and above this is covered by the lender. This is called a ‘No Negative Equity Guarantee’.
Due to the nature of how equity release works in that interest can be added to the loan rather than ‘paying it as you go’, a higher interest rate means that the debt will grow larger and faster, and if house prices also decrease, their future value may not cover the full cost of the loan which will leave lenders out of pocket. Understandably, not many people have sympathy for lenders, however, their response to this has simply been to lend less on a property.
Where are we now
Following the mini budget, the departure of the Chancellor Kwai Kwarteng and resignation of the PM Liz Truss the following week. Jeremy Hunt and Rishi Sunak were appointed into the roles of Chancellor and PM respectively. This has brought some stability to the market and Jeremy Hunt delivered his ‘Autumn Statement’ on 17 November 2022 reversing all the policies introduced in the mini budget from the previous regime.
In October, inflation on CPIH (Consumer Price Index with Housing Costs) was 9.6% and that was up from September at 8.8%. At time of writing the latest figure for inflation in November 2022 is 9.3% which is at least heading in the right direction. This appears to be largely due to a fall in oil prices. Current predictions by many economists are for inflation to fall further next year as we are in recession and likely to remain so for a while. During recession, the economy typically shrinks, unemployment usually rises, and consumer demand reduces which ‘takes the inflationary heat’ out of economies, but at a cost.
For equity release, we have seen a re-introduction of plans and all lenders now have some offering in the marketplace. We have also seen a return of the sub 6% rate environment which is encouraging, the lowest equity release rate available at the end of September was 5.08% then it increased to 6.57% in October, we are now seeing rates starting in the high 5% range. These are positive signs, but it seems likely that the further we get into 2023, the better the outlook will be.
What Could Equity Release in 2023 Look Like
Predictions are that rates will see downward pressure and perhaps stabilise around the 5% mark, which, if you look historically is in line for where they were around 7 or 8 years ago. I also compares with the rest of the mortgage market. In terms of customer demand this is expected to increase as confidence returns to the market however, we expect to see more ‘need based’ objectives, e.g., help dealing with debts, repaying mortgages, essential property improvements, and to supplement retirement incomes rather than ‘want based’ objectives e.g., holidays, new cars, and aspirational borrowing.
With the squeeze in mainstream mortgage availability and reduced affordability, I expect that we will see a rise in cases of ‘Bank of Mum and Dad’ or even ‘Bank of Grandma and Grandad’ to support with deposits for properties and to help family out, in addition to some customers having to borrow to maintain their own living standards given the current high fuel and living costs. It is also expected that we will see a further market correction in terms of property prices as there were large increases during the first half of 2022.
The key to making any decisions on equity release is, as we always say, to get good advice from a qualified advisor. This is more important than ever as they will help you navigate the different options or may suggest an alternative to releasing equity.
Accessing advice is always free at Lifetime so don’t be afraid to ask, Contact us today.
