Interest rates are rising within the equity release market and the average lifetime mortgage rate has now surpassed 5.00% for the first time since 2019, according to the latest Moneyfacts data.
Figures from the Equity Release Council for Q1 2022 saw customers unlock £1.53bn of property wealth in total.
This was up 14% from £1.34bn in Q4 2021 – previously the busiest quarter on record – and up 34% year-on-year from Q1 2021.
A majority of new customers have chosen drawdown (54%) over a lump sum option, according to the Equity Release Council.
Rachel Springall, finance expert at Moneyfacts.co.uk, said: “Retirement plans could be hindered by the rising cost of living and consumers may be considering ways to plug the gap, such as by releasing wealth tied up in their home.
“Interest rate rises were widespread within the lifetime mortgages sector throughout June 2022. The average interest rate charged has breached 5.00% and stands at a six-year high.
“Choice of lifetime mortgage options has remained relatively stable since the start of the year, with around 630 deals to choose from today, but the abundance of options on offer far outweighs what was available in 2020.
“There may be various reasons why consumers decide to use equity in their home to cover costs, such as clearing debts or funding an income shortfall.
“According to a recent study by LV=, more than one in 10 retirees still had mortgage debt when they retired, and retirees have seen their living costs increase by £163 per month (nearly £2,000 a year).
“Instead of drawing income from their pension fund to cover unexpected living costs, a lifetime mortgage may be an option, but it is vital consumers seek advice to weigh up all the details before they commit.
“The cost of living crisis could hinder family members from getting onto the property ladder, and if appropriate, equity release can be a suitable option for consumers looking to pass on earlier inheritance to their children.
“A drawdown option may be enticing for homeowners who only need to release a little bit of wealth as and when they need it in this instance, which will also mitigate incurred interest.
“According to the Equity Release Council, in Q1 2022, 54% of new customers opted for drawdown lifetime mortgages.
“In the midst of rising interest rates, consumers may feel pressured to take out a lifetime mortgage, but it is imperative they seek independent financial advice to ensure it’s the right choice for both them and their relatives.
“Homeowners may find they can avoid pulling wealth out of their property altogether, but if it is the most appropriate choice then they must be conscious of how equity release works and its resulting impact.”
