A return to the norm?
Before I talk about the changes happening in the world of Equity Release, it’s worth setting the scene in terms of the property market, interest rates and the wider economy.
The Bank of England base rate was slashed in early 2009 to support a recovery from the global financial crisis. In 2021 inflation started to rise meaningfully, and accelerated through 2022. The Bank has sought to tackle this by pushing the base interest rate upwards, from a low of 0.1% in 2020 to 5.25% at the time of writing. It seems to be working, slowly, and we should see inflation continue to fall during 2024. However, it is worth noting that the base rate has averaged around 9% over the last 50 years, and many of my clients, whose average age is around 75, see current interest rates as a return to the norm.
Both Nationwide and Halifax reported an uplift in house prices in October 2023. It would be unwise to jump to any conclusions too soon, but may suggest we’ve seen the ‘bottom’ of the curve.
Later Life Lending. Equity Release is no longer the only option
Unlike our economy, the market I work in is definitely not returning to the norm. Far from it. Product innovation, new providers entering the market, an increase in choice for consumers, will all drive a new and revitalised market in 2024. However, I think the time has come to stop talking about Equity Release in isolation. I prefer to call it the ‘Later Life Lending’ market, as this better describes the huge range of products and options now available to homeowners over the age of 55.
The term ‘Equity Release’ only captures two products; Lifetime Mortgages and Home Reversion Plans. There are now at least 7 different products I discuss with my clients, including;
- Retirement Interest Only Mortgages (RIO)
Often called RIO mortgages, these work in a similar way to an ordinary Interest Only mortgage, but they have no fixed term. Instead, the loan runs for the rest of a client’s life or until they move home, perhaps to another property (where they may take a new RIO mortgage) or into care. The borrower pays interest each month, and the amount they can borrow will be determined by their income and an affordability assessment by the lender. As advisors, we have access to the lenders’ affordability criteria and can quickly tell our clients how much they can borrow and how much it will cost. More lenders are entering this market and 2024 will see choice increase.
- Regular Mortgages
Gone are the days when all mortgage lenders would draw the line at a certain age. I believe an increasing number of lenders will review and extend their criteria this coming year, and some already allow borrowers to take a loan to age 85 or beyond, while others have removed their age limits completely. As long as you can afford to meet the regular payments, lenders will lend.
- Hybrid mortgage products
The term ‘Hybrid’ is often used to describe mortgage products that look like a regular mortgage, but then allow you to transition into a RIO or Lifetime Mortgage at a later date. This is the latest innovation in the sector, and 2024 will see further possibilities emerging for borrowers who were otherwise trapped in an unaffordable mortgage and being forced to sell.
- Bridging Loans and second charges
Although not restricted to the Later Life Finance market, access to short-term borrowing can be a huge advantage for older borrowers. For example, if they are downsizing but want or need to move into their new home before their current one is sold, a bridging loan with retained interest (so there are no monthly payments) can be a useful tool in giving them time to sort out their current home. 2024 could be the year to avoid the stress of a simultaneous sale and purchase, especially if you are experiencing declining health.
- A Lifetime Mortgage – Lump Sum
Unlike a normal mortgage, a lifetime mortgage has no fixed term and offers greater flexibility. The mortgage runs for the rest of a client’s life or until they move home. At that point the property is either sold and the mortgage repaid, or if moving house, it can be transferred, or ‘ported’ to a new property. Interest is charged in the same way as any other mortgage, but with a Lifetime Mortgage the borrower can choose to let it roll up on top of the loan, pay some or all of it each month, or make ad hoc repayments. The amount you can borrow is based on the borrower’s age and the value of their property. 2024 will see new entrants to this market, which in turn will put competitive pressure on interest rates. Borrowers will benefit from this, so if you have older clients thinking about borrowing in this way, 2024 will be the year to do it.
- A Lifetime Mortgage – Flexible Drawdown
Sometimes this is known as a reserve facility. This is an amount pre-agreed when the lifetime mortgage is first taken out and allows the borrower to withdraw (draw down) these funds when they want them. This can be on a regular or ad hoc basis, and the advantage is there is no interest to pay until the money has been drawn. This is ideal for topping up income regularly, paying for ongoing care in the home, or simply as a safeguard for the future. The borrower, or their Attorney, has complete control over how much and how often funds are withdrawn. Inflation and the cost of living increases have put more retired people under pressure, and I can see the demand for drawdown facilities increasing in 2024.
Written by David Forsdyke, head of Later Life Finance at Knight Frank Finance