Equity release and soaring gilt yields

For most people, equity release tends to be a last resort, unless it’s being used for specific purposes such as gifting or inheritance tax planning. Downsizing is always an alternative, but in practice, many clients are reluctant to give up their existing home. Even where they do downsize, it’s often only a modest reduction, and once you factor in the costs of moving – including legal fees and stamp duty – the financial benefit can be limited.

With equity release, the current challenge is whether to borrow more now to lock in today’s rates, or to draw funds gradually to keep interest costs down but risk facing higher rates later. Unless there is a significant planned expenditure, I would generally favour taking withdrawals as and when needed rather than borrowing a large lump sum in advance.

If gilt yields continue to rise, we should expect equity release rates to increase further. And if the markets don’t buy the Budget, we could see equity release rates rise sharply.

Lifetime Mortgages are the anomaly to the rest of the mortgage products, as mortgage products are built on Gilt prices that have been steadily increasing, whilst the Swap Market has seen some good improvements over the last 12 months. For example, the difference between a 10yr Fixed deal for a traditional mortgage with Nationwide is as low as 4.59%, whereas the equivalent Lifetime Mortgage will be around 7%. With the failings of our government pushing up the cost of borrowing options for our Equity Release clients, those same borrowers being locked into high rates for the rest of their life, any Budget that ultimately pushes these rates further will give those most in need an impossible financial headache and see equity disappear.

Remember those 45 nightmarish days, when Truss was Prime Minister and bond yields shot thought he ceiling? They might be back, the the limp lettuce this time seems to be Rachel Reeves. Her approach to the economy seems to have been trying to fill her black hole of the back of British business, and expecting there to be no repercussions for jobs. Not just equity release, but mortgage rates could reach double digits if the very worst case scenario unfolds and the markets completely turn their backs on UK plc. We are far from there at the moment, but the government need to pick up the pace, because the bond bourses wont allow them to sleep walk into the abyss.

Rates for equity release aren’t so much on a knifes edge but more a perverse game of snakes n ladders, with borrowers loosing. The lack of confidence in government plans to fix the economy is causing further issues of rising yields meaning borrowers are paying more for the pleasure of accessing equity.
Those considering lifetime mortgages should think hard about how soon they want the funds, as this uncertainty is likely to last beyond any Budget and could get worse unless a firm grasp is taken on the countries reins by our Chancellor. If a sell off in the bond market were to happen, I would not be surprised to see well in excess of a further 1 or more percent added to the cost of the typical lifetime mortgage
For borrowers without the luxury of time, don’t hesitate, often the more crippling impact of not taking action is more damaging than a higher rate, most borrowers don’t use lifetime mortgages for the rate, its for the relief and flexibility they offer.