The Question
What will happen to equity release rate if interest rates go down? I am wavering over whether to take out a plan at the present time but with the current high interest rate environment I am reluctant to push ahead.
I have heard the Bank of England may cut interest rates later this year. Should I wait till then or is this unlikely to impact equity release prices?
For information, I have a £420k property which is mortgage-free, and I am well past retirement age, so eligible for ER. I would like to release approx. £100k but need more guidance on this and the rates side. Thank you.
Mark’s Answer
Thank you for your question, and as I am sure you are aware that recent economic conditions caused inflation to rise and interest rates increased on mortgages, and savings and investments. There is good news with inflation continuing to fall. However, with increased interest rates, it’s savers who are benefiting from higher returns after many years of low interest rates from deposit-based investments.
Although I am not an economist, many expert commentators have predicted that interest rates have peaked, and with this in mind, we have seen some recent reductions in equity release interest rates with both Lifetime mortgages and Retirement Interest Only (RIO) Mortgages, although interest rates can go up as well as down of course.
Equity release interest rates don’t necessarily follow the Bank of England base rate like residential mortgages do. With the funding lines of the equity release providers being mainly annuity backed, it’s the government gilt rates that usually influence the direction of equity release interest rates.
This is something we follow ourselves to gauge potential rate changes with the 15 year Gilt Index being a good barometer for this.
Therefore, as fixed interest rates are difficult to predict let me discuss the features that may be available to you from a RIO Mortgage and a Lifetime mortgage, should you want to consider borrowing the capital you need for your objectives.
Firstly, if you were eligible for a Retirement Interest only mortgage, you could secure the plan for the rest of your life and you could secure a fixed interest rate for two or five years and consider a re-mortgage without penalty in the future if interest rates become more favourable.
Secondly, with a Lifetime mortgage you have several features that could assist you including the option to borrow a smaller amount of capital initially, and then drawdown further capital from a cash reserve facility in the future.
The initial lump sum will be at the current fixed interest rate. However, you will not pay interest on the capital held in the cash reserve until you draw it down Any additional borrowing from this cash reserve will be on the prevailing rate at that time – which could be lower or higher than the current fixed rates of interest.
Another option would be to borrow the capital you need and then manage the fixed interest by making capital payments and maintaining a level balance. With fixed early repayment charges on Lifetime mortgage plans being any of four, eight, 10 or 15 years, it may be possible to remortgage the plan and secure a new lower fixed rate of interest in the future, depending on market conditions.
However, please note that a remortgage would incur advice and legal fees at that time, and future terms and lending conditions are not guaranteed. Once again it should be noted that interest rates can rise and fall, and it is impossible to say what they will be in the future.
I would suggest that you discuss your options and personal circumstances with one of our expert, whole of market advisers who will be able to explain all features and options available to you and then make you a bespoke recommendation after assessing your objectives and plans.
Meet our expert…
Mark Gregory, founder and CEO of Equity Release Supermarket, is here to answer your questions. Mark is an adviser himself with over 20 years equity release experience.
He launched Equity Release Supermarket 10 years ago and it has grown to become one of the UK’s leading equity release specialists.
Email kate.saines@emap.com to ask Mark a question
