But rates will take a long time to stabilise and borrowers looking at higher loan to value (LTV) tiers may struggle as lenders look to minimise risk to falling house prices.
According to figures from Moneyfacts, the average lifetime equity release rate, which is combined for fixed and variable rates, in November sat at 8.13 per cent.
This is continuing an upward trend, especially in the later half of the year when rates jumped from 5.77 per cent in August to 6.02 per cent in September. Rates then climbed to 7.54 per cent in October.
Average rates have also more than doubled since last year when deals were pegged at 4.38 per cent.
Product choice has also shrunk, dropping to 310 in November, a low for this year. The number of lifetime equity release deals has been contracting over the course of this year, reaching a high of 717 in May and then gradually falling to 527 in October.
Pricing slowly edging down
Andy Wilson, director of Andy Wilson Financial Services, explained that the equity release market was “badly affected” by the rapid increases in lifetime mortgage interest rates after the mini Budget, but noted the deteriorating UK economy had already “set the scene for higher prices of long-term gilts”, which rose significantly this year.
He said gilt prices, which dictate lifetime mortgage pricing, had “dropped back” after the Autumn Statement, which had brought some confidence back into the market and lowered expectations for significant base rate rises.
“I believe we may see further reductions in rates in early 2023, but this will be slow, and we will not see the eye wateringly low rates we experienced in 2021. The lowest available rate during that year came in at 2.20 per cent, but now the lowest rates are closer to 5.90 per cent and peak at over two percent more than this,” Wilson noted.
Paul Neal, mortgage and equity release specialist at Missing Element Mortgage Services, said the lending market was “starting to stabilise”, with some reducing rates and others coming back to market.
He added: “Rates overall are still high and, when rolled up, are enough to turn the stomach of any potential clients. Lenders need to get a grasp of the current loan to values (LTV), as increased rates and lower LTVs are now making equity release a much less attractive prospect.
“For some clients, it’s their only option, leaving them with very little equity left in their properties. If you are looking for equity release, we recommend you deal with a a reputable adviser, with accreditation from the likes of Society of Later Life Advisers (SOLLA), which will ensure that this is the right thing for you and ensure that are fully aware of the risks involved.”
Dan Osman, head of later life lending at UK Moneyman, agreed that the maximum LTV offered had “decreased significantly”.
He said that whilst there was “still a fair amount of choice for mainstream cases”, clients looking for a higher LTV tier are “likely to struggle for the foreseeable future”.
Osman added: “I do not believe we have yet seen an increase in LTVs to match the lower rates available so there is likely to be an anticipation of decreasing property prices as well as concerns over the roll up of interest at higher rates.”
Rolled-up debt and house price crash predictions key lender concerns
Wilson said that lenders would continue to look closely at rolled-up debts rising faster than higher interest rates and predictions of falling house prices.
He continued that predicted house prices falls has made it “necessary” for lenders to minimise their potential exposure to the no-negative equity guarantees, and the “easiest solution” was to cut maximum loans that could be offered and widen the gap between mortgage loan and property value.
Wilson said that the drop in lifetime mortgage products, especially at the higher LTV tiers, and higher interest rates had led to a “surge of new business” as homeowners tried to beat rate rises.
He continued: “This has now ended and most advisers I speak to have seen business drop off a cliff. Very few expect it to pick up again until January, and even then it may be slow to recover.
“Many advisers are recommending clients bide their time to see what happens to rates. A lifetime deal at a high interest rate could prove very costly, and unless there is an urgent need to raise funds, it may be more sensible to hang fire and see where the market goes.”
He said that those looking for aspirational purchases should adopt a “wait and see approach”.
“What we will definitely see next year however, are lots of less well off homeowners who have been crippled financially by the rising cost of living, rising energy prices and fuels, and some of these may have to bite the bullet and move forward to survive,” he added.
Gary Boakes, director at Verve Financial, said that the “appetite for equity release is going to grow massively next year”, but the market is “going to have to be very careful”.
He explained: “We are already hearing of people releasing equity as a safety precaution due to the cost of living crisis and with rates still at higher levels than previously this potentially could cause long-term issues.
“The current rates and product choice are starting to improve, but as we see more providers getting the appetite to lend back, we should see a more competitive market and with that rates should drop and more products become available. My advice hasn’t changed for equity release: it is still that you need to make sure that you are releasing the equity for the right reasons.”
Osman said that he expected “continued, if decreased, volatility” throughout 2023 if the government managed to avoid further economic turmoil.
He noted that price normalization could be on the cards for early 2024, but they were unlikely to be at the low rates seen a few years ago.
“I think that rates will need to stabilise at a lower level than current deals and that we will need to wait for the predictions of 30 per cent drops in house prices to be proven wrong.
“Advice to customers at the moment depends very much on need versus aspiration. There will always be customers who need to act and those who can safely wait and that is difficult to encapsulate in a couple of sentences but minimising initial borrowing is appropriate for many,” he said.
Price reduction ‘calm before the storm’
Samuel Mather- Holgate, independent financial adviser at Mather and Murray Financial, said that the slight reduction in rates experienced over the last few weeks could be the “calm before the storm”.
“The Bank of England will increase the base rate further, and as this government unravels, confidence in the economy will dry up and gilt rates will also rise.
“I don’t see anything positive on the rates front for at least six months. If clients want to apply for equity release, rates shouldn’t stop them because objectives are rarely centered around what will be owed in the future,” he added.
Mather-Holgate said if clients were rate sensitive, applying now before further rises could be sensible or they could wait for a year for rates to come down again.
