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"Golden opportunity for homeowners" for equity release with current rate environment

Journalist: John Choong (Head of Markets and Research), Newspage

ended 11. September 2024

An increasing number of homeowners are interested in taking on equity release (ER), according to the latest Equity Release Council (ERC) survey. As such, those interested in the scheme could find themselves in a favourable position in the current rate environment, as research from Newspage and Sad Rabbit Investments found that the effective cost of borrowing is now at its lowest since the Global Financial Crisis (GFC) in 2008.

According to the ERC, 61% of homeowners are interested in ER, up from 57% in 2021, partly due to the cost-of-living crisis. Care-related costs was the main reason cited by 17% of respondents, followed by a need to boost retirement income (16%), and funding travel plans (15%). This increase in ER demand intersects with the best circumstances the market has seen since 2008, given the current rates being offered by several providers and gilt yields today.

Over the last two decades, the average ER rate has always hovered in the 5-7% range, and above the average rates of a standard 2-year or 5-year mortgage. Thus, when interest rates fell to sub-1% following the GFC, the effective cost of borrowing skyrocketed, as gilt yields plunged, while ER rates remained elevated.

For context, the average ER rate was 6.39% pre-GFC, with the 15Y gilt yielding an average of 4.67%, making the average cost of borrowing 1.71%. However, while the average ER rate did drop ever so slightly to 5.70% post-GFC, the average 15Y gilt yield plateaued to 2.43%, thereby almost doubling the average cost of borrowing to 3.27%. But at no point since the GFC has the cost of borrowing touched sub-2%, until today, where it’s at 1.62%, thanks to a rise in gilt yields.

Of course, homeowners will still have to deal with costs, as the interest generated from gilts won't be enough to fully offset the interest charged by the lender for the equity released. This is because interest from gilts doesn't compound, while the lender's loan does. But with house prices rebounding and the effective cost of borrowing at its lowest, this could help provide the biggest interest coverage for those interested in ER since 2008.

Newspage asked brokers, economists, and IFAs for their views on this bit of research, whether homeowners should consider equity release , and whether this could impact the housing market.

8 responses from the Newspage community

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Editor
Gabriel McKeown
Head of Macroeconomics at Sad Rabbit - Substack Newsletter
We are entering a golden opportunity for homeowners as the effective cost of equity release plummets to a 15-year low. The tide has finally turned in this elevated rate environment, presenting a potential windfall for cash-strapped homeowners, with rebounding house prices and stabilising gilt yields. This could significantly impact wealth distribution, especially with Chancellor Reeves refusing to rule out increases to IHT, as more retirees tap into home equity to pass wealth between generations.

This could also be a strategic tool to mitigate tax liabilities. Equity released from your home can reduce your estate's overall value, thus lowering the potential IHT liability, especially if newly released funds are put into tax-efficient vehicles such as ISAs. This could be beneficial if IHT rates or thresholds are adjusted unfavourably. And with a 'Golden Dawn' breaking, this could provide homeowners with a chance to unlock the value in their properties, should they choose to seize it.
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Iain Swatton
Managing Partner at Later Life Property
With house prices climbing and borrowing costs reducing, this might be the best time in over a decade to consider equity release. Many homeowners, particularly those on fixed incomes, feel the pressure from rising inflation and the removal of the Winter Fuel Allowance has only worsened the strain, but many will see Equity Release as a potential solution.Homeowners may have significant value in their property, and ER allows them to unlock this without selling. While risks exist the industry is evolving with new ER products offering flexibility, including smaller, regular withdrawals and options to pay off interest over time, thus reducing the long-term impact. As interest in ER grows, it may stimulate the housing market. Many use ER funds to support family members whether helping first-time buyers with a deposit or assisting with home-mover costs. Another reason to be cautiously optimistic.
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Patricia McGirr
Founder at Repossession Rescue Network
Remember the old adage: you can’t borrow your way out of debt. Equity release is back in the spotlight, with borrowing costs at a 15-year low. For homeowners squeezed by rising living costs, it’s tempting to see this as an easy way out, but it's far from a simple solution.

Redemption penalties, compounding interest, and fluctuating gilt yields mean this isn’t free money, it’s a loan that can shrink your estate faster than you might think.

Rebounding house prices can make this more attractive, and there are potential tax perks if you know how to navigate them, but as more people turn to equity release, we could see ripple effects, with demand pushing up house prices and creating new pressures in the housing market.

In the right circumstances, Equity Release can be a smart move, but it’s far from a magic bullet. You’re playing with the value of your home. Get it wrong, and you might be left with less than you bargained for. It's essential to get the right advice.
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Editor
Simon Bridgland
Director at Charwin Private Clients
Although the cost of borrowing with a lifetime mortgage could be seen as relatively low at present, interest rates are always marginally higher than traditional mortgage rates as the rates are based on a Gilts (government loans) rather than Swaps, which determine traditional mortgage rates. In current market conditions, users of lifetime mortgages need to be aware of redemption penalties as Gilt yields could be considered high. Some lifetime mortgages have variable penalties, so costs are unknown until you request to get out of the contract. The penalties for these loans will be measured against a benchmark rate, which would be set at the time the mortgage was offered. So, if Gilts yields reduce from when the benchmark is set, it means the borrower is likely to have a penalty to pay. If the yields increase above the benchmark, the likelihood or amount of penalty is reduced. For certainty of all costs, opt for a fixed redemption penalty, as gilt yields will vary.
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Editor
Darryl Dhoffer
Founder at The Mortgage Geezer
Rising interest rates could increase borrowing costs, while falling house prices might affect the value of equity released. Living longer than expected may lead to higher overall costs. The impact on the housing market and mortgage industry, and the growing popularity of equity release, could drive up housing prices due to increased demand. It might also reduce demand for new mortgages as homeowners use equity release to pay off existing loans. The growing market could lead to increased competition among lenders, potentially resulting in more favourable terms for borrowers. So the question whether is now the optimal time depends on individual circumstances. For those who need access to funds, the current low interest rates and rebounding house prices make it a more attractive option. However, it's crucial to carefully weigh the risks and benefits before making a decision.
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Stuart Powell
Managing Director at Advice Guru
Although this is an intellectually interesting article, it does not represent how Consumers think. Homeowners over the age of 50 use their property wealth either because they have to or want to. Those who have to are considering an event on the horizon where they need to raise capital, such as the end of an interest-only mortgage term. The other main group are consumers who want to raise funds from their property for reasons such as gifting to family, IHT planning or improving their own lifestyles. Neither group analyse the differential between current rates and historical average gilt yields. They are far more interested in the current interest rate versus previous and potential future rates, or what is affordable to them.
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David Nicklin
SSAS Consultant at Retirement Capital
Equity release rates are at a 15-year low, attracting homeowners looking to ease financial pressure. While equity release offers immediate funds, compounding interest and potential penalties can quickly erode the value of your estate.

For retirees, a well-managed pension, like a SSAS, could be a more tax-efficient option. You can access your pension while preserving your home’s value for future generations. Equity release has its place, but it should be part of a wider strategy, not the first port of call.

For those concerned with inheritance tax (IHT), equity release may help reduce your estate’s value and lower IHT liabilities. However, it’s crucial this aligns with a broader retirement and estate strategy. Pensions, trusts, and tax-efficient vehicles like a SSAS might offer better ways to access funds and protect wealth. It's essential to get independent advice before borrowing against your home.
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Mark Scott
Director and IFA at Positive Advisers Ltd
There has undoubtedly been an increase in the supply of lenders and advisers. Increased competition, in my opinion, explains the closing in the margin between the 15-year rate and the average interest rate.

The increase in supply can be attributed to increased demand and future forecasts of demand from an ageing population with inadequate pension provision. Equity release is fast becoming part of mainstream retirement planning. The Labour government's attack on pensioners can only further fuel the need for individuals to access capital from their primary residence.