Low interest rates have driven activity in the mainstream mortgage market so this week, Mortgage Solutions asked: Do you think it’s realistic or possible for equity release rates to go even lower and what effect would that have on the market?
Simon Chalk, managing director at Later Living Now
I said in May 2013 that I could see fixed rate lifetime mortgages falling below five per cent by Christmas. Two major players in the market disagreed with me, and the rest is history.
Roll forward six years and we have rates well below three per cent. That I did not see coming, but let’s be fair, who did?
This current period of super-low rates is astonishing and has encouraged many into equity release.
Being able to lock into borrowing at less than three per cent fixed is phenomenal value. It has also stopped lazy public media journalists from tiresomely reporting how equity release ‘doubles your debt in just 10 years’.
The question that faces our sector now is can rates fall much further and when (not if) will they begin to climb to a state of equilibrium?
There are folks better qualified than I to offer a view on long term interest rates, but as an adviser sitting in front of clients with expectant looks on their faces, I have to offer my view.
My stock answer to clients is that we are at, or certainly very near, the bottom of a rate cycle, so expect them to rise in the future. Perhaps not to the circa seven per cent of the past, but to around five per cent.
I remind them that cheap money is not reason enough to take equity release. I don’t allow a ‘buy now while stocks last’ mentality to affect my judgement. Equity release is either right or wrong for our clients with rates but one issue to consider.
Andy Wilson, director of Andy Wilson Financial Services
The current unprecedented low interest rates for lifetime mortgages have been driven by a desire from lenders to increase business volumes and market share.
It is clear that total market lending this year will fall short of targets set at the start of 2019, and we may well see lending figures close to last year at just over £4bn.
This has led to ‘rate wars’ with interest rates below what could be regarded as commercially viable by some of the bigger players, who are desperate to maintain market share.
They have the means and appetite to lend, but have not had the demand, and they are trying to resolve this by squeezing margins very tightly.
I believe we have seen rates hit the lowest they will go, and we will shortly see them start to rise again. This will start with increases to the unprofitable sub-three per cent rates, followed by higher loan to value rates.
I have not personally seen an increase in enquiries because rates are so low. If clients want to consider equity release, they usually do so without knowing what they will be charged.
The economic and political uncertainty caused by Brexit issues may be causing some potential borrowers to hang fire yet, ironically, these concerns should really be reasons to get on with it now. Rates can only go up, and lower house prices means lower funding amounts.
One consequence of the rate wars ending may be more product innovation – which is welcomed. Lenders can change rates in a matter of hours, but competitive advantage from more flexible product features is hard to challenge quickly.
David Forsdyke, head of later life finance at Knight Frank
I don’t believe equity release lifetime mortgage rates will fall any further. We appear to have reached the bottom of the curve.
Indeed, some lenders are already issuing notice of rates increases in the near future, so I think they’ll start going in the other direction now. There is a close correlation between long term gilt prices and lifetime mortgage funding, and we are already seeing a very slight recovery in gilts which I expect will prompt a rise in lending prices.
I think we’ve reached a point where the market has become more visible and customers are quite pleasantly surprised by how cheap it is.
Even with interest rates rising slightly we’ll still see some really good deals around the three per cent mark, there’s still quite a few products below three per cent available. Even if they start rising a little, I don’t think it’ll put consumers off. I think the market will continue to grow.
For a lot of customers, the interest rate is not necessarily the most important factor.
What is important is what equity release can actually do for them. The cost of these things matter, but it might not only be the deciding factor.
In terms of impact on the market, recent lower rates have meant the speed at which interest compounds on top of a lifetime mortgage has slowed right down.
I remember advising clients back in the mid 2000s that their lifetime mortgage would double in size every 10 to 12 years. Now it can be as much as 20 to 24 years.
