Equity release repayments reach record high
“While mortgage pricing has jumped across the board, lifetime mortgage rates have weathered the storm better than some residential mortgages.”
Growing numbers of equity release customers are reducing their borrowing costs by making partial repayments when they can afford to.
Lifetime mortgage holders are repaying record amounts of capital to the tune of more than £21 billion each quarter, according to the Equity Release Council’s Autumn 2023 Market report, up from £17 billion before the pandemic.
People are also taking smaller loans and a smaller percentage of their available equity, as they adapt to steeper interest rates.
Equity release rates, along with standard mortgage rates, have risen over the past few months, following 14 consecutive increases in the Bank of England base rate to bring inflation down. This has made equity release a less appealing option for those worried about costs, as interest rolls up over time and is compounded, meaning the amount you owe can increase quickly. Compound interest works by charging interest on the total amount of the loan, including the interest that has already built up.
However, David Burrowes, chair of the Equity Release Council said: “The stark outlook for people’s pension prospects means property wealth will remain a vital part of the equation to avoid a cost-of-retirement crisis.
“While mortgage pricing has jumped across the board, lifetime mortgage rates have weathered the storm better than some residential mortgages.”
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Although you don’t have to make any repayments when you release equity, as the loan and interest charged on it only needs to be paid back when you pass away or move into long-term care, high borrowing costs are often a major concern for those who don’t want to see any inheritance they’d planned to leave reduce dramatically over time. Many people therefore now aim to make repayments whenever possible, therefore reducing their overall costs. All equity release products issued since March 2022 must allow customer to make voluntary penalty-free partial repayments, typically up to 10% of the loan each year.
Making partial repayments can have a dramatic impact on overall borrowing costs. For example, according to the Equity Release Council, someone borrowing £100,000 at a rate of 7% over 10 years would see their costs mount up to £200,966 if they didn’t make any repayments over this period. However, if they repaid £2,527 each year – the average voluntary partial repayment made during the first half of 2023 – over 10 years, they’d reduce their total lifetime mortgage costs to £163,121, saving £37,846.
Similarly, if you were to borrow the same amount over 15 years, the total cost would be a massive £284,895 if you didn’t make any voluntary repayments. However, if you paid the same average annual £2,527 average partial repayment, you’d save £69,306, bringing the total cost of your lifetime mortgage over 15 years to £215,590.
If you’re considering equity release, it’s vital to seek professional financial advice, as unlocking property wealth could affect your entitlement to mean-tested benefits, as well as reducing any inheritance you might have wanted to leave loved ones. It’s essential to only deal with members of the Equity Release Council, as products offered by council members must come with a ‘no negative equity’ guarantee. This means that should property prices fall, and the amount left when your property is sold is not enough to repay what you owe, you won’t be liable to pay any more.