The amount of housing equity tapped by the UK’s older homeowners jumped by 28 per cent to £5.2bn in 2022, according to official figures that underscore concerns pensioners are using equity release mortgages to cover rising living expenses “without properly understanding the costs”.
The value of lifetime mortgage sales — equity release loans — among the over-60s rose from £4.1bn in 2021 to £5.2bn last year, according to figures from the Financial Conduct Authority obtained via a Freedom of Information request by advisory firm Bowmore Financial Planning.
Inflation remains at double-digit levels in the UK, while interest rate rises have led to big increases in the costs of borrowing. The FCA this week highlighted the difficulties being faced by borrowers of all kinds, with 10.9mn people struggling to meet bills and credit payments at the start of the year, up from 7.8mn in May 2022.
Separately, repossessions of mortgaged homes were up 50 per cent to 750 in the first three months of 2023 compared with the previous quarter, according to figures published on Thursday by lobby group UK Finance.
Equity release allows homeowners to take out money from the value of their home and remain in it, as the loan is repaid from the sale of the property only when the borrower dies or moves permanently into a care home. Interest on the loan is rolled up and paid back, along with the capital sum, when the home is sold, though providers now offer the ability for borrowers to make overpayments.
The FCA last year issued a warning to the industry about the risks of poor-quality advice, the need for customers to be treated fairly and for fair value on fees.
Writing to lenders in June 2022, it said it was particularly concerned that consumers in financial stress “may be more susceptible to the purchase of unsuitable equity release products. We expect firms in this portfolio to consider how the cost of living crisis is likely to impact consumers and take the necessary steps to support consumers and mitigate harm.”
Bowmore said the jump in equity release sales suggested more borrowers were using it to shore up their finances during the cost of living crisis. But it warned that higher interest payments could more quickly eat into the equity remaining on their property.
Mark Incledon, chief executive at Bowmore Financial Planning, said: “Equity release is often advertised as a ‘no-brainer’ that gives elderly borrowers the buffer they need to tie them over in the short term. Unfortunately, many of them will find they have tied themselves into a long-term commitment without properly understanding the costs.”
The average interest rate charged on an equity release loan is 6.17 per cent, including both fixed and variable deals, up from 4.81 per cent in May 2022, according to finance website Moneyfacts. However, average rates have been coming down since November 2022, when the turmoil of the “mini” Budget sent them spiking to more than 8 per cent.
The option for homeowners to make part-repayments on equity release loans — and therefore retain more of their equity — was adopted by the Equity Release Council, the industry body, as a standard for all providers last year. It said the number of these penalty-free repayments rose by 48 per cent in 2022 on the previous year, reducing the value of loans by £102mn.
The average equity release plan was £133,216 in 2022, according to ERC figures. It said this sum would support a “moderate lifestyle” for a single pensioner for 12 years. However, the average taken out dropped sharply in the first quarter of 2023 to £61,785, a six-year low, as the higher interest rate environment activity curbed demand, the council said.
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