The lowest interest rate on equity release is currently around 6.97%. This is for a mortgage with an LTV (Loan to Value) of less than 20%. Interest rates for equity release mortgages are determined by age and LTV, and clients with a higher LTV may be facing fixed rates of 10% or more (as of November 2022).
If there’s one word on everyone’s lips right now, it’s ‘interest’. With inflation at record levels and the Bank of England adjusting the interest rates almost monthly, it’s a worrying time for both savers and borrowers. For those who own their own home and have paid off their original mortgage in full, there is the option of remortgaging to release equity in your home. But what is equity release? And how can interest rates affect an equity release remortgage? Our no-nonsense guide will take you through the process.
Jump to section:
What effect does LTV have on interest rates
Will the recession affect equity release interest rates?
Will a fixed rate or variable rate be better?
Everything you need to consider
Top tips for securing a fixed interest rate in 2023
What is equity release?
Equity release is a way of unlocking the equity in your home without having to re mortgage, or effectively ‘sell’ your property and move to a new property. The most common type of policy is a lifetime mortgage, which works in a similar way to a regular mortgage, where you borrow money from a lender. That loan is secured against the value of your home. Rather than repaying monthly, an equity release mortgage is paid from the sale of your home on your death or if you move into permanent residential care.
There is another type of plan called a Home Reversion Plan, where you sell all or part of your property for less than the market value. You then stay in your home, but as a tenant.
At DWG Mortgages we don’t sell or recommend Home Reversion plans. So when we talk about Equity Release we are referring to Lifetime Mortgage Products only.
Who can apply for an equity release mortgage?
There are specific criteria that you have to meet to be eligible for an equity release lifetime mortgage.
- You must be at least 55 years old to apply for a lifetime mortgage. If you are borrowing with your partner, you must both be over 55 to apply.
- The property you own must be in the UK.
- The property must be your primary residence (so you cannot take out a lifetime mortgage on a holiday home, for example)
- You will need to check if your property is eligible, as some equity release schemes limit what type of properties can be remortgaged. The property must also be in good condition without major structural issues such as subsidence. These criteria are basically the same as you will find on any other type of mortgage application.
- Most lifetime mortgages stipulate that your original mortgage must have been paid in full. Some will accept you if you still have outstanding payments on your original loan, but you will have to pay these off simultaneously as you take out an equity release mortgage. That can eat into the amount of cash you get.
What if I have family living with me?
If you have family dependents living with you, it is important that they seek legal advice. They may have to sign a waiver stating that they understand they will not have the right to continue living in the property if you die or move into residential care. In that instance, equity release may not be the right choice for you, and you should talk to a financial expert to see what other options are available.
What is LTV?
You may have come across the term ‘Loan-to-value’ or LTV while looking at property equity release packages. LVT is your property’s loan-to-value or the difference between the size of your mortgage and the amount of equity your home would yield.
To break it down, imagine you’ve taken out a mortgage on a property worth £250,000. You’ve paid a £50,000 deposit, leaving you with a mortgage of £200,000. Effectively, when you take out your mortgage, you already own 20% of the property and are paying the mortgage on the remaining 80%.
The more you pay, the more you ‘own’, and the greater your equity. So once you’ve paid off a further £50,000 of your mortgage, you now own 40% of the property outright. As time goes on, your LTV ratio will decrease, and your equity will go up.
An equity release remortgage takes into account your LTV to work out how much interest you’ll pay. The lower your LTV, the lower your interest rate.
Will the recession affect equity release? – Interest rates uncovered
We’ve all seen the rise in interest rates impact lending during 2022, and in the first week of October, the lowest rates on offer were around 6.9% for applicants with less than 20% LTV. A year ago, 2021 rates were closer to the 2% mark, so it’s clear that equity release remortgages have been just as susceptible to the whims of a volatile market as other types of loans.
In reality, where the Bank of England have increased interest rates recently (primarily to combat inflation and to try and stabilise very jittery financial markets), the rates are often nearer to 10%, and many providers have reduced their maximum LTV levels.
Lenders do this to reduce the risk of borrowers taking out remortgages they will struggle to repay. Although its important to note that just because the LTV is lower, there are still no guarantees that repayments will be affordable. This is why it’s essential to talk to a mortgage adviser.
Several factors will affect the equity release interest rate a lender offers you. We’ve already looked at the LTV ratio, but other influencing factors that could drive your interest rate up or down include the following:
- Your age
- Your marital status and whether you are taking out a joint equity release mortgage
- How much you want to borrow against the value of your property
- Whether your property is likely to go up or down in value over the next few years
- Whether you have any special features or extra benefits tied in with your remortgage plan.
That fourth point may be one of the more difficult factors to predict. With reports that the cost of houses may actually decline over the next couple of years as a recession starts to bite, we may see further course corrections by lenders over the next 12 to 18 months.
The current economic climate and how equity release interest rates are being affected
Previously, the decision to go for a variable or fixed-rate interest deal would have been a little more complex. At the time of writing, that decision has become even more difficult. Currently, high-interest rates make an equity release mortgage more expensive. Arranging a fixed-interest mortgage at this point would mean that you’d be paying a higher interest rate regardless of whether the base rate drops in 2023.
So at first glance, a variable interest rate is the logical choice. However, we are at the start of a recession, not the end. That means interest rates could go higher before they start to drop. In this case, a variable-interest-rate arrangement starts to lose its appeal slightly.
Ultimately, this will depend on how the UK progresses over the next 12 months and how high interest rates go before they start to drop back. But it’s worth looking around for fixed interest-rate equity release lifetime mortgages that align with the Equity Release Council’s framework.
It may not be the cheapest option if interest rates fall off a cliff in a few years’ time, but it will prevent you from being overwhelmed by interest repayments on a variable lifetime mortgage if the recession is deeper and longer than expected.
Remortgaging for equity release in 2023 – Everything you need to consider
If you’re planning to release equity from your house, there are a few things you need to consider.
1 – Financial and legal advice
It’s important to speak to a solicitor and a tax adviser when you are considering Equity Release.
2 – The current economic climate
We’ve already had an in-depth look at this above, but as we move into 2023, you will need to spend a little bit of time looking closely at fixed-interest-rate lifetime mortgages as opposed to variable-rate options, which may be far more influenced by the fluctuations of the economy.
3 – The reduction of high-value LTV products
To ensure that clients are not overburdened with debt and in line with the principles of responsible lending, the reduction of high-value LTV products (where the loan-to-value amount on your property is tipped towards a higher loan amount and lower value) is likely to continue into 2023. That means that some clients will either be unable to find an equity release plan that considers their current LTV situation or would be better off seeking some alternative form of financing. This could be through a personal loan or money transfer credit cards for smaller amounts.
4 – The spectre of negative equity
It hasn’t happened for some decades, but with a long, deep recession, there is always the possibility of a larger-than-predicted drop in property prices, and some borrowers will find themselves in negative equity. This is when the value of your property drops below the amount of the outstanding mortgage. It may be wise to watch not only how the Bank of England reacts over the next six to 12 months but also to keep a close eye on the buoyancy of the property market, especially the value of ‘like-for-like’ property in your area.
5 – Energy prices and the cost of living
With the cost of living also rising sharply and the possibility of fuel prices heading back up again, everyone’s finances will be squeezed throughout 2023. If you are considering taking out a property equity release mortgage, do your sums carefully to make sure that you can afford it, especially during uncertain economic times.
Our top tips for securing a fixed interest rate through a Lifetime Mortgage
- Shop around for the lowest interest rate – Mortgage providers and lenders still want to do business, despite the current economic climate. Deals are out there, why not let us help you shop around to find the best one.
- Pay off more of your mortgage – Getting the lowest equity release interest rate you can find will depend on your LTV – the higher the percentage of a property you own outright, the lower any interest rate will be on an equity release remortgage.
- Get a survey – an equity release mortgage will depend on the condition of your property. If things need fixing before you apply for that mortgage, a survey will highlight them so you can get the work done before you apply. That will mean you’re more likely to be accepted – and at a lower rate – as the value of your property will have increased due to the work done. You’ll also be able to release more equity from your house if it’s in better condition. (NB All Equity Release mortgages are ultimately subject to a survey that is usually organised by the lender not the borrower.)
- Don’t forget the extras – there will be fees to pay when you arrange a lifetime mortgage, which could make the first repayments a little more expensive than you first thought. Don’t forget to factor these fees in when you’re doing your calculations.
- Get expert help – Mortgages and equity release can be a financial minefield. If you’re unsure how to get the best deals or are confused by the difference between a variable or fixed equity release interest rate, talk to a financial expert to get independent, impartial advice. Most importantly, get legal and tax advice.
DWG Mortgages – your Equity Release specialists
DWG Mortgages are a small, family-orientated business providing a personal service for hundreds of clients in Kent, the southeast and across the UK. We offer a wide range of mortgage and protection products and advice, including specialist mortgages. We understand how difficult the current situation is, but we’re aware that our clients still want to normalise their lives as much as possible with prudent financial planning and products that won’t break the bank.
With DWG you’ll get no-nonsense, practical and impartial advice that considers your unique situation, needs and aspirations. Before planning your equity release finances, why not take advantage of a free consultation with one of our team? Call us today on 01795 608 042 or use our online Contact Us form. It’s quick, easy, and could make 2023 a much more financially stable year for you and your loved ones.