Equity Release Rates increasing as Gilt Pricing worsens

In contrast to the prevailing sentiment, we may actually be entering a golden opportunity for certain homeowners as the effective cost of equity release plummets to a 15-year low, experiencing its most favourable conditions since the 2008 GFC. Over the past two decades, ER rates have historically hovered between 5-7%, consistently outpacing mortgage rates. However, when interest rates plummeted to below 1% in the wake of the GFC, the effective cost of borrowing for ER paradoxically increased due to falling gilt yields. Consequently, in this elevated rate environment, the tide has turned. The cost of borrowing, which nearly doubled from 1.71% pre-GFC to 3.27% post-GFC, has now retreated to levels not seen in over a decade. This has presented a potential windfall for cash-strapped homeowners, with rebounding house prices and stabilising gilt yields. A 'Golden Dawn' is breaking with an unprecedented chance to unlock the value in their properties, should they choose to seize it.

Canada Life have predicably increased rates following recent changes in the Gilt markets. This has left some in a bit of quandary, although costing more in interest, they have given a greater loan size to the end user. So, if the borrower is looking to max out the available loan amount, Canada Life have just helped by increasing the loan to value. Ive just spoken to a client today who applied only two days ago on the old rate, they now have the choice to borrow a further 7k which is greatly needed, but on a rate 0.23% more than they had applied for, so its not all doom and gloom.

Given the typical correlation between Equity Release product rates and Gilt prices, rising Gilt yields can lead to higher Equity Release interest rates. As these rates often remain fixed for the borrower's lifetime, innovative product design is essential to mitigate potential risks. One promising approach could be to offer products with lower Early Repayment Charges (ERCs). This can encourage borrowers to repay their loans early, reducing accumulated interest and potentially lowering overall costs. Additionally, it could provide borrowers with the flexibility to review their mortgages if market rates become more favorable, or allow lenders to offer rate reductions to retain existing customers."

Rate increases for Lifetime Mortgages are always difficult to stomach, as these rates are designed to run for the whole duration of the mortgage term. Small increases can equate to a significant increase in the total amount borrowed. With the abrupt increase in Gilts over the past few days, the older borrowers may hold back a little with their borrowing plans. Still, we could do with a different pricing model given that the differential between 'normal' mortgages and Lifetime Mortgages can be as much as 2.5-3% more in certain situations.