Old Kwasi Kwarteng’s exit from number 11 was the second quickest in history, and we’ve had four Chancellors in as many months. So, who knows what will have happened from right now until the time you are reading this.
Unfortunately, what I am certain will happen is interest rates will likely remain high and things will get worse for borrowers. The rapid hike post-mini Budget has left many people nervous and the mortgage market is rightly trepidatious. Plus, with more inflation predicted, and more rate rises threatened to combat this, I fear we are only at the start of a long and bumpy road.
The impact of rates on equity release
For equity release, many will be looking at the rising rates as a serious downside to getting a lifetime mortgage. According to financial data analyst, Defaqto, the lowest rate available at the start of October on any equity release product was 6.87 per cent, which had jumped from 4.44 per cent in just a week . This is less than ideal, obviously.
However, how should we look at interest rates in the equity release market? Those who follow my columns will know that I have been arguing that interest rates on lifetime mortgages must be looked at through a different lens to the mainstream market. I have been fighting this case throughout the years of historic lows, and nothing will change now rates are rising.
The difference from a standard mortgage
Ultimately, a lifetime mortgage is very different to a normal mortgage.
Yes, they sound similar and share some features. But, in essence, they are more cousins than siblings. At the heart of the difference between the two, aside from their numerous safeguards, lies their repayment models.
One, the mortgage most of us are familiar with, demands consistent and immediate monthly payments, while the other, specifically designed for a smaller number of older people who are already on the property market, demands no such monthly payment.
This essential difference is one of the key reasons why an equity release product will always have a higher interest rate than a standard mortgage. Of course, interest rates will always be an important concern for both residential mortgage holders and lifetime mortgage customers alike – but the immediate impact they have is different and they are very different products.
It is because of this difference, along with numerous features, that customers look to choose a lifetime mortgage and whilst the interest rate is of course important it’s not just this element of the product that determines a client’s decision.
Rates aren’t everything
As an industry, equity release should look to convey this in a clearer way to customers and explain why flexibility, choice and consumer safeguards are as important as rates when it comes to choosing a lifetime mortgage.
Rate rises are obviously not what customers want, nobody is saying that, especially when things are getting more expensive across the board. However, the lifetime mortgage is unique in that interest rate changes do not have to have an immediate effect.
They do of course have a long-term effect and this is important for every customer to understand.
