Older homeowners are being forced to take out expensive equity release loans as the cost of living crisis leaves hundreds of thousands of people struggling to pay off their mortgage.
Research by equity release provider Key showed almost one in three over-55s said they would find it difficult to meet their mortgage repayments due to soaring inflation. In total nearly 900,000 over-55s will take longer to clear their mortgage as rising bills eat into their income.
However equity release is far more expensive than it used to be, financial advisers warn.
Average rates have jumped from 6.09pc to 6.76pc since late September, according to financial analyst Defaqto, while the cheapest deals have disappeared altogether. The lowest rate a borrower can take out is 5.94pc from the lender More2Life, whereas three months ago rates went as low as 4.44pc.
The interest on a lifetime mortgage compounds over time so the rate has a huge impact on how much the borrower ultimately owes. If a homeowner took out a £100,000 loan at today's best rate of 5.94pc and did not pay off the interest, then after 20 years they would pay back £327,091 – nearly £85,000 more than if the loan had a 4.44pc rate.
Katie Brain of Defaqto said recent market upheaval had left borrowers with reduced choice.
She said: “The number of products available has more than halved from 711 three months ago to 335 today. Some providers such as One Family have decided to withdraw from the market completely for the time being because of the recent instability.”
Clearing a mortgage is one of the most common reasons why homeowners choose equity release, according to Key’s research. A quarter of borrowers who take out a lifetime mortgage do so to help with mortgage repayments.
New borrowers could remortgage to another deal in future that “may offer better rates or features than those available today”, according to Will Hale of Key. Borrowers can also choose to pay back some or all of their monthly interest on an equity release loan to stop the debt from rolling up, he added.
But there is always a risk that some borrowers will find it harder than expected to pay off the interest.
Kevin Bailey of financial adviser Wessex Investment Management said he was concerned that providers’ television adverts were encouraging homeowners to take out equity release loans for short-term financial problems in the cost of living crisis.
He said: “My concern is that with the proliferation of television adverts that many homeowners will seek out equity release to resolve short-term funding issues yet tie-up their property in a long-term solution that may prove costly to correct.”
He added that the impact of compound interest is worse for younger borrowers between the ages of 55 and 60, as this gives the interest on the loan longer to roll up.
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