New entrants cause equity release interest rates to fall
Equity release interest rates have continued to fall for new customers, with competition in the sector credited with forcing existing providers to lower their prices.
Tapping into property wealth through equity release has become a more mainstream option, with £3.1bn withdrawn by homeowners in 2017, up from £1.6bn in 2015. However, the high cost is often cited as a major reason for consumers to avoid taking out a plan. Falling rates could tempt even more older homeowners into the market.
Figures from the Equity Release Council (ERC), the industry group, said the average rate offered to new customers was 5.22pc in July. This is considerably lower than the 5.96pc average recorded a year previously. Simon Chalk of Later Living Now, an equity release advice firm, credited the recent arrival of firms such as Legal & General and Onefamily as having forced existing providers to raise their game. “New entrants have come into
the market seeking to offer something different,” he said.
However, consumers should always consider the overall cost of equity release. Even if rates are initially low, the way interest is charged means the cost can soon mount up. Equity release plans “roll up” charges, which means that interest compounds and the overall debt increases quickly.
For example, a homeowner who releases £100,000 of equity from a £250,000 property with a typical rate of 5.22pc would face interest charges of about £5,200 in the first year of their plan. By year 15 this would have spiralled to £10,600 a year.
Although no capital needs to be repaid while the borrower is living in the home, the entire value of their property would be whittled away after about 18 years by the interest.
As well as driving rates down, new providers have helped boost the choice of plans. ERC data shows the range doubling in the last two years.
But with rates falling Mr Chalk suggested that some people would be better off waiting to take out a plan, unless they needed the cash urgently.
“If homeowners can afford to wait, they will benefit by deferring the effect of compounding rolled-up interest, but this could be negated should rates in future be much higher,” he said. “If someone really needs the money now, they should do it now. If not, wait.”
However, falling rates will offer little comfort to existing policyholders, who are still paying much higher rates. As Telegraph Money reported earlier this month, those who took out loans before the financial crisis can be paying 7pc or more, with high exit charges preventing them from switching to a cheaper deal elsewhere.
Those considering releasing cash from their homes should wait if they can