Pitfalls of Equity Release as Interest Rates Rise
There is no hiding from the fact that the cost of living is taking its toll. Since the end of the Covid-19 pandemic, the cost of living has been increasingly on the rise, with the cost of everyday items more expensive than ever.
With this, interest rates are also on the rise, which is why we have assessed the pitfalls of equity release as interest rates rise.
Whilst UK home owners reaped the rewards of the inflated house prices we saw in 2021, the rising interest rates are now well and truly taking effect.
Most recently, interest rates have risen due to the uncertain and unprecedented political landscape we find ourselves in.
If you are aged over 55 years old, then you have most probably seen the value of your houses rise over the years, meaning that you have probably built up a significant amount of equity over the years.
However, with house prices more expensive than ever and mortgage rates on the rise, your children and grandchildren will now struggle to even get their foot on the ladder.
This is why more and more pensioners and retirees are now considering equity release as a way of helping their loved ones during these uncertain and difficult times.
Whilst equity release allows people aged over 55 years old the chance to gain access to their equity, during uncertain times and rising interest rates, it can turn into a very costly and expensive option.
The costs of equity release easily add up, with initial set up costs and higher interest rates than traditional mortgages. This is why critics and industry experts are now warning people of the pitfalls and dangers of releasing equity from your home.
However, despite their claims and rising interest rates, more people than ever are dipping into their equity via equity release schemes.
In fact, the Chief Executive of one leading equity release lender has been quoted saying that more people than ever are choosing equity release to ‘recycle’ their money, referring to over 55’s passing down their equity and wealth to younger family members.
With more and more people releasing equity from their home, and with other external forces such as the Covid-19 pandemic and the war in Ukraine, almost all equity release lenders have recently increased their interest rates, making equity release loans more expensive than ever, and leaving borrowers in a predicament.
If you want more information on the pitfalls of equity release as interest rates rise, then get in touch with Equity Release Warehouse.
Please call our 24-Hour Helpline: 0330 058 1579
What is Equity Release?
Equity release is a popular type of loan and mortgage which allows individuals aged between 55 and usually 90 years old the chance to release equity from their home.
If you are aged over 55 years old, then you are most probably sitting on a large amount of equity that has built up in your house. T
his is most likely due to the increase in house prices over the past few decades and the fact that you have probably paid off a large amount of your mortgage.
When an individual releases equity from their home, they are essentially taking out another loan on the property. They will gain access to their equity, tax free but will also have to pay interest on their loan.
However, equity release loans are different to traditional loans, because you do not have to repay a penny of your equity release loan whilst you live. Instead, you only have to repay the loan when you pass away or move into a care home.
In this instance, your loved ones sell your house and use the proceeds of the sale to pay off the equity release loan.
It is important to understand how interest on an equity release loan works. Interest rates on equity release loans are typically higher and more expensive than they are with traditional mortgages.
This means that your interest will add up faster, as it turns into compound interest. This will increase the overall loan amount and therefore the amount of interest you have to pay in the future. Compound interest is like paying interest and interest.
In order to stop this interest from compounding, you can choose to pay off some of the interest on your loan as you go. By doing so, you will reduce the overall loan amount and therefore increase how much inheritance you are due to leave your loved ones.
If you are considering equity release but are confused as to how it works and are worried about the pitfalls of equity release as interest rates rise, then speak to our team at Equity Release Warehouse.
Please call our 24-Hour Helpline: 0330 058 1579
What Are the Current Equity Release Interest Rates?
Interest rates on equity release loans are always higher than they are with traditional mortgages. This is one of the biggest pitfalls of equity release as interest rates rise. Interest rates also differ drastically depending on which lender you opt to go with.
When you first sit down with your equity release adviser, they will search the market for the very best interest rates and plans for your and your current situation.
Interest rates on equity release loans are ever changing, which is why it is hard to keep track and keep up to date with interest rates.
However, the typical rate on an equity release loan sits at around 4.33%, but can change frequently and has also been known to hit 5.63% with some lenders recently [1]. This is the highest we have seen interest rates for equity release loans in a long time [2].
In January 2022, borrowers were paying just 4.10% for an equity release loan. As you can see, interest rates are increasing at an alarming rate.
These rises in interest rates are in line with rises in traditional mortgage interest rates. This is all because the Bank of England increased their base rate twice in 2022, meaning that lenders are also now driving up their prices, too [3].
Unfortunately, these means that if you are currently borrowing, then you will find yourself having to repay more in interest than ever.
However, with equity release loans, borrowers do not have to repay their loan until after they pass away. Whilst the interest will still be charged and added to the loan, those who take out an equity release plan are not forced to repay any of it until after they pass away.
Nevertheless, by ignoring the interest on your loan, you are only increasing how much money you will have to repay the lender upon sale of the house, and therefore how much inheritance you leave your loved ones [1].
Unfortunately, this is not the first time we have had high interest rates when it comes to mortgages and equity release loans. Interest rates hit an all time high in July 2012 where they hit 6.69% [2].
Nevertheless, there are more lenders on the market than ever who all charge different and competitive interest rates. In fact, there are now over 600 different types of equity release loans available to you, all with different interest rates.
Please call our 24-Hour Helpline: 0330 058 1579
How Do We Know If Interest Rates Will Drop?
For the best part of 2022, there was only one story on the news that everyone wanted to talk about, which was the cost of living. The question on everyone’s lips is ‘will interest rates drop soon?’
As much as we want them to, it is hard to say whether interest rates will drop. Whilst some financial advisers and specialists think that they might drop by 2024, it is impossible to say at this stage.
However, if interest rates do drop, now might be a good time to release money from your home and take out an equity release loan.
If you want more information on interest rates and the pitfalls of equity release as interest rates rise, then speak to the team at Equity Release Warehouse.
Please call our 24-Hour Helpline: 0330 058 1579
Common Equity Release Mistakes People Make in Uncertain Times
Unfortunately, when times are tough the general public do tend to panic and make poor financial choices and decisions. When interest rates start to rise, people react in different ways.
This is why more people than ever are worried about the pitfalls of equity release as interest rates rise.
Whilst some people choose to stay away from taking out loans and mortgages, others choose to release money in an attempt to protect their lifestyle and family.
Below is a list of the pitfalls of equity release as interest rises. At Equity Release Warehouse, we want to reduce the amount of mistakes people make during these times of financial uncertainty, which is why we have created a list of common mistakes people make during uncertain times.
Mistake 1 – Releasing More Than You Need
The biggest mistake people make when releasing equity from their home during uncertain times is releasing more money than they need from their home.
Unfortunately, every equity release loan will charge you interest. You are charged interest on the amount of money you release. This means that if you release a lot of money, then you will pay more interest.
In addition to this, you will always be charged more interest than you earn. Even if your equity release cash is in a savings account, when interest rates are high the amount you have to pay will be more than your savings account earns you.
You must also remember that if you do not repay your interest as you go, then your interest will quickly turn into compound interest.
In order to avoid this from happening, you should make sure that you only release the money that you need, and not a penny more. You should try to look ahead to the next two years and only release the money that you need to see you through these next couple of years.
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Mistake 2 – Allowing Your Interest to Compound
One of the biggest mistakes people make when releasing equity from their home is allowing their interest to compound. Unfortunately, when you opt for a lifetime equity release mortgage, you will be charged interest on your loan. This is one of the biggest pitfalls of equity release as interest rates rise.
This interest compounds month on month and year on year. As no one forces you to repay your interest as you go, a lot of people allow this interest to compound.
When this happens, your next of kin will have to use the proceeds of your house sale to pay off the loan itself and the interest that would have compounded significantly over the years.
Although it might be tempting to allow your interest to compound when interest rates are high, we do not recommend it.
At Equity Release Warehouse, we always suggest that you pay off your interest every month or at least every year, so you avoid this from happening. If you are worried about the pitfalls of equity release as interest rates rise, speak to Equity Release Warehouse.
Please call our 24-Hour Helpline: 0330 058 1579
Mistake 3 – Releasing Equity At a Young Age
Whilst all equity release advisers do not allow people to release money from their home until they are at least 55 years old. However, even so, releasing equity from your home at 55 years old might even be a risk.
This is mainly because the older you are, the more equity you are allowed to release form your home. In addition to this, the interest rate will also probably be lower the older you are.
However, a lot of people choose to release equity from their home as soon as they hit 55 years old, which is never a good idea. By taking out an equity release loan at such a young age, your plan will last long and therefore charge you more money by the time you pass away.
This means that your interest will compound over a long amount of time, reducing the overall amount of inheritance you leave your next of kin.
Please call our 24-Hour Helpline: 0330 058 1579
Mistake 4 – Making Early Repayment Charges
Unfortunately, when people take out equity from their home at a young age, their circumstances are more likely to change. At Equity Release Warehouse, we see a lot of people who released equity at a young age try to pay off their loan as their circumstances change.
However, it is incredibly important to remember that by doing so, you will most likely be charged an early repayment charge.
People might choose to repay their equity release loan because they are no longer in a position to continue. However, early repayment charges can add up to a lot, which might be hard to pay off if interest rates and the cost of living are both high.
Early repayment charges differ between lenders, and some lenders won’t charge you at all. However, it is worth noting that some lenders will charge you up to 25% of the total value of the loan if you choose to pull out early.
However, if you are downsizing properties and want to pay off your equity release loan with the profit you make, then you might be able to opt for downsizing protection which means that you will not have to pay an early repayment fee.
Alternatively, you might be able to apply for a significant life event exemption, which means that you are given leeway for mitigating circumstances and are able to pay off your loan in instalments over three years.
If you are considering equity release, make sure that you ask about early repayment charges on your specific equity release loan.
As you can see, there are a number of mistakes that people make when releasing equity from their home during uncertain and turmoil economic times.
There are also a lot of pitfalls of equity release as interest rates rise, which is something you should speak to your equity release advisor about in depth before opting for equity release.
Please call our 24-Hour Helpline: 0330 058 1579
So, Should You be Considering Equity Release?
As you can see, there are many reasons why you should be a little bit more cautious when it comes to taking out an equity release loan during uncertain political and economic times, and especially when interest rates rise.
However, at Equity Release Warehouse we feel passionate about equity release and all the good it can bring you in later life, especially when times are hard. We do appreciate that you might feel more risk averse during high interest rates, which is why we offer free initial advice for anyone who needs it.
It is always recommended that you speak to one of our advisers at Equity Release Warehouse before making any commitments.
Our team is happy to talk you through the equity release process, rising interest rates and whether now is the time to release equity from your home or not considering the list of pitfalls of equity release as interest rates rise.
Below are a few reasons why we think releasing equity from your home right now is a good idea.
The Equity Release Council introduced a new standard at the end of March 2022, meaning that all equity release loans must allow individuals to make any voluntary repayments on their equity release loans,
This means that more people will be able to repay some of the interest on their loan, which will reduce how much interest you pay on the loan and how much you have will to repay overall. With interest rates on the rise, this is a great thing.
In addition to this, with the increase in products across the equity release market, more and more lenders are becoming increasingly competitive. This means that they are offering more flexible equity release loans.
Finally, with interest rates on the rise and the economic climate unsteady, standardising authorities such as the Equity Release Council and the Financial Conduct Authority are becoming tighter and tighter.
They are likely to introduce more standards over the next couple of years as the financial and equity release landscape changes.
If you want more information on whether you should be considering releasing equity, despite the pitfalls of equity release as interest rates rise, then speak to a member of the team at Equity Release Warehouse.
Please call our 24-Hour Helpline: 0330 058 1579
What are the Advantages of Equity Release?
At Equity Release Warehouse we believe that there are more advantages to disadvantages to equity release, despite the pitfalls of equity release as interest rates rise.
A huge advantage of equity release is that you are able to spend the money however you want to. This is a great feature if interest rates and the cost of living are on the rise. This is because you might choose to pay off any other loans or debt with your equity release funds.
Alternatively, you are able to gift your equity release money to your loved ones, if they are struggling with rising interest rates and the cost of living. You can choose to pay your grandchild’s house deposit or University fees, which will go a long way towards their financial future.
In addition to this, all equity release loans are regulated by the Financial Conduct Authority and a lot are members of the Equity Release Council.
These regulating bodies help to ensure that the equity release industry and all lenders are fair, honest and transparent, and that they truly have the best interest of their clients at heart.
This means that despite the pitfalls of equity release as interest rates rise, these bodies will try to ensure that the industry remains fair and transparent.
With interest rates on the rise, now might not be a good time to move house, as any mortgage you apply for now will include these more expensive interest rates. This is why you should consider equity release, as it allows you to remain living in your home for as long as you want.
When interest rates are high, so is the cost of living. As a result of this, your monthly budget might have to increase. The great thing about equity release is that you get to enjoy your equity release whilst not having to make any repayments.
You only have to repay your equity release loan when you pass away and move into long term care, which allows you to spend your money on other things whilst you enjoy your retirement.
Finally, thanks to the Financial Conduct Authority and Equity Release Council, all equity release loans across the UK will include a no negative equity guarantee.
This means that even if your house decreases in value, which is what might happen with rising interest rates, your loved ones will never need to cover the cost of your loan after you pass away.
The no negative equity guarantee ensures that even if the value of your house decreases so much that it no longer covers the cost of your loan after you pass away, your loved ones and next of kin will never have to repay the difference between the value of your house and the equity release loan.
As you can see, there are many benefits when it comes to equity release, despite the pitfalls of equity release as interest rates rise.
If you would like more information on how releasing equity from your home might be right for you, then speak to a member of our team at Equity Release Warehouse for more insight.
Please call our 24-Hour Helpline: 0330 058 1579
How Does Releasing Equity Affect My Ability to Claim Benefits?
As you can see, there are a few pitfalls to equity release as interest rates rise. On this note, it is worth mentioning that when you take out an equity release loan, your ability to claim for any means-tested benefits will be affected.
It is important to tell the Department for Work and Pensions that you have qualified for an equity release loan if you do receive and claim for any benefits. Not only might it reduce how many benefits you are able to claim, it might stop them altogether.
When interest rates and the cost of living are both high, then you will need to be careful when stopping forms of income such as benefits. Make sure that you are making the right financial decision for you.
If you do currently receive any means-tested benefits and are considering releasing equity from your home, then speak to someone at Equity Release Warehouse for advice and support.
Please call our 24-Hour Helpline: 0330 058 1579
Which Scheme is Best?
If you are considering releasing equity from your home in an attempt to protect your family and retirement from the cost of living, then it is important that you pick the right equity release loan for you.
There are two main types of equity release across the UK, which are known as lifetime mortgages and home reversion plans.
1. Lifetime mortgages
Lifetime mortgages are easily the most popular type of equity release across the UK. They are used by individuals aged over 55 years old to release equity that would otherwise be tied up in their home.
Lifetime mortgages charge you interest on your loan, which compound over time. However, you do not have to repay your loan until you pass away and your loved one sells your house to pay off this loan.
If interest rates are high, your interest will compound exponentially and add a significant amount onto your loan.
2. Home reversion plans
With home reversion plans, you usually do not have to pay any interest on your equity release loans. This is because a home reversion plan involves selling a percentage of your home to a lender, instead of paying interest on your loan.
By doing so, the lender owns a percentage of your property. This means that when your loved ones come to sell your house once you die, a percentage of the sale of the house will go directly to the lender, instead of your next of kin. This means that your loved ones will not receive as much inheritance.
Please call our 24-Hour Helpline: 0330 058 1579
What Should I Do Next?
As you can see, there are a number of pitfalls of equity release as interest rates rise.
At Equity Release Warehouse, we understand that when times are tough, it is sometimes easiest to bury your head, do nothing and sit tight. However, we truly believe that equity release helps thousands of people across the UK every year.
If you are currently worried about rising interest rates and the cost of living, then speak to our team at Equity Release Warehouse.
Our team of professional advisers and specialists will talk you through the benefits of equity release, as well as the potential pitfalls of equity release as interest rates rise.
If you would like more information on equity release, then give us a call on 0330 058 1579 or by visiting us on www.equityreleasewarehouse.com for more insight and information.
References
[3] https://www.bankofengland.co.uk/boeapps/database/Bank-Rate.asp
