Equity release rates hit six-year high

Older homeowners must now pay thousands of pounds more to release cash from the value of their home after equity release rates rose to a six-year high.

The average lifetime mortgage rate has now risen well above 5pc for the first time since before the pandemic, climbing to 5.63pc this month, according to analyst Moneyfacts.

It comes as a record number of older homeowners have turned to equity release to tackle surging inflation and rising tax bills.

The average interest rate of a lifetime mortgage, the most popular method of equity release, has climbed by 1.53 percentage points since the beginning of the year, up from 4.1pc in January.

The rise means a typical £132,000 lump sum loan would accrue an additional £2,000 in interest in its first year, before being rolled over and added to the original debt.

Almost half of new lifetime mortgage borrowers opted for a lump sum loan in the first three months of this year, the cost of which can easily snowball. Whereas drawdown plans, where borrowers only pay interest on smaller instalments taken less frequently, typically help keep interest rates lower.

Rachel Springall, of Moneyfacts, said interest rate rises had been “widespread” in the equity release market in recent weeks.

She added: “Retirement plans could be hindered by the rising cost of living and consumers may feel pressured to take out a lifetime mortgage, especially as interest rates are rising quickly.

“But it is imperative they seek independent financial advice to ensure it’s the right choice for both them and their relatives.”

A record 23,400 retirees cashed in £1.53bn from their homes in the first three months of the year, according to trade body the Equity Release Council – a 21pc jump compared to the same period last year.

Samuel Mather-Holgate, of advice firm Mather and Murray Financial, said clients were already having second thoughts about using equity release to raise funds.

Mr Mather-Holgate said: “Although equity release is a lifetime commitment and affordability is considered, lots of clients do want to ensure some sort of legacy is available for family members and higher rates will erode this.

“It’s still a great tool for the right clients, but difficult conversations are becoming more common.”

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