Homeowners are running out of time to save thousands by switching to a cheaper equity release deal as rock-bottom rates begin to disappear.
After falling for years, equity release interest rates are creeping up ahead of an expected rise in the Bank of England base rate.
There were 121 equity release loans under 3 per cent a year ago. But as of last month there were just five, figures from data analysts Moneyfacts reveal.
Going up: After years of falling prices, equity release interest rates are creeping up ahead of an expected increase to the Bank of England’s base rate
The average rate has also crept up over the past 12 months, from 4.03 per cent to 4.38 per cent.
It comes as the pandemic house-price boom means there is about £740.5 billion of property wealth now available to older homeowners, according to Canada Life.
In more than half of England and Wales, they could also unlock an average of £72,988 from their homes — above the average pension pot of £61,930, analysis by Legal & General reveals.
About 300,000 homeowners have equity release mortgages, says trade body the Equity Release Council.
The loans, which are available to borrowers aged 55 and over, do not require monthly repayments. Instead, the interest is rolled up and the loan repaid when the last surviving owner dies or goes into long-term care.
The mortgages have soared in popularity in recent years, with lending expected to reach a record £4 billion by the end of the year, according to broker Key.
But the loans can be very expensive, with compounding interest causing debts to snowball.
Earlier this year, Money Mail called on borrowers to speak to an adviser after we revealed they could potentially save tens of thousands of pounds by switching to a cheaper deal.
Mail readers who contacted broker Age Partnership are now in line to save a total of more than £870,000 over the next 20 years. But with rates rising again, borrowers must act fast.
After years of falling prices, equity release interest rates are creeping up ahead of an expected increase to the Bank of England’s base rate
Equity release rates are influenced by long-term corporate bond and government gilt yields.
Rising inflation has made gilts less attractive to investors, who do not want to tie their money to an interest rate that could lag behind the future cost of living.
And as demand for gilts fall, yields rise, as do equity release rates. Borrowers taking out a £70,000 loan over 20 years at 2.96 per cent, the lowest rate on the market, will pay £16,853 more in interest than a homeowner who decided to sign up to last year’s cheapest deal that came in at 2.22 per cent.
Andrew Morris, senior equity release adviser at Age Partnership says: ‘Although there are still plans with low rates available, even a small rise in rates can make a huge difference to the amount of interest you’ll pay over the life of your loan.
‘Anyone thinking about having a review should do it sooner rather than later.’
However, one major catch is that equity release loans often come with hefty early repayment charges that can run into tens of thousands of pounds.
Stacks up: Borrowers taking out a £70,000 loan over 20 years at 2.96%, the current lowest rate, will pay £16,853 more in interest than if they had signed up to the cheapest deal last year
Some reduce to zero over the years. Others have penalties that can rise and fall depending on gilt yields and may last until borrowers reach 90 years of age.
Brokers say high exit fees are one of the main reasons that families do not switch deals. But many borrowers do not even know they are entitled to remortgage.
‘There’s still an awful lot of people out there who don’t know they can switch plans,’ says Mr Morris.
‘Not everyone is eligible to switch but it’s worth having a free review to double check.
‘In the first six months of the year, borrowers switching with us have saved an average of £60,000.
‘That’s £31 million in total.’
So far this year, Key estimates that it has switched 3,000 borrowers to a new lender, or a different plan with the same firm.
But watchdog the Financial Conduct Authority (FCA) does not insist brokers carry out reviews of older loans.
And lenders are not permitted to contact borrowers to tell them if rates have fallen, so switching rates remain low.
Just 1,011 remortgages to a new lender took place last year, according to a Freedom of Information Act request to the FCA.
The Equity Release Council is calling for improved communication between lenders, advisers and borrowers after equity release mortgages are taken out.
It will issue new guidance to lenders and advisers in January.
Borrowers who want a review can find qualified advisers on the Equity Release Council website (equityreleasecouncil.com/find-a -member/advisers/).
The FCA did not respond to a request for comment.
- Money Mail has produced a complete guide to equity release. To discuss switching your existing plan, or to order your free copy of our guide, call 0808 239 0549 or visit mailfinance.co.uk/review.
