We all know how Covid-19 has changed the world we live in – you can’t be online for more than a few minutes without mention of Covid. However, what you may not be aware of is the impact on equity release and lifetime mortgages.
Impact of Covid on Later-Life Lending
In this article, Rowan Frayling – Mortgage, Protection and Equity Release Specialist – considers the impact of the Coronavirus pandemic on both interest rates and demand.
Impact of Covid on Interest Rates
Let’s consider first, the impact of Covid on interest rates. Cast your mind back to 2018 and the average interest rate for equity release was 5.29%, with the lowest available at 3.78%. Fast forward to 2020 and last year the average had dropped to 2.80% with a low of 2.24%.
To put that into monetary terms, someone who took £50,000 on an average rate in 2018 will see the debt rise to just over £83,000 in 10 years’ time; whereas someone who did this in 2020 will owe just under £66,000 in 10 years. Both examples assume no interest payments are made. However, many modern equity release lifetime mortgages have this facility, which means Joe Public in my 2020 example, could stop the balance increasing by paying £116 a month or having family contribute, which is something I touch on below.
Demand for Lifetime Mortgages
The other main change in the landscape of later-life lending is the reasons for taking a lifetime mortgage. It is perhaps no surprise to see that releasing equity for holidays or for personal spending has dropped a little, given lockdown restrictions. But, if we look at the amount of money released – rather than fancy pie charts showing the reasons – the largest sums released are not for the aspirational spending but for more practical reasons – gifting to family being the biggest. £1 of every £5 released was gifted, totalling £756 million!
This is of little surprise to me, as an adviser who looks at both mortgage and equity release, because I see my younger mortgage clients who have felt the squeeze from the banks reducing the number of high loan to value options available. Many who saved hard for a 5 or 10% property deposit are now being asked to look at 15% as a minimum. Although in the latter stages of 2020, 10% options started returning, but interest rates are in some cases at least 1.5% higher than they were pre-pandemic.
Therefore, consumers of varying ages from 20s to 50s, are looking to the Bank of Mum & Dad or Grandma & Grandad to assist them and family releasing equity on these new historically low rates is a viable option for some.
Lastly, I promised to touch on the option of interest servicing. Consider this…a parent releasing equity for their child to purchase a property is effectively advancing their inheritance and, to avoid the loan interest rolling up, the child could further protect their inheritance by paying the interest – subject to affordability. In any case, having a larger deposit could reduce the interest rate on the child’s new mortgage, making it more affordable.
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Established in Berkshire in 2004, J Finance Ltd is one of the leading financial planning companies in the area. We serve clients across England and Wales. If you would like to discuss this subject or any other financial matter, please contact us on 01635 521 300 or email firstname.lastname@example.org.
Sources quoted: Key Market Monitor 2020
EQUITY RELEASE CAN AFFECT THE FUTURE INHERITANCE OF YOUR BENEFICIARIES, NOT TO MENTION YOUR OWN FINANCES. THEREFORE, IT IS IMPORTANT THAT BEST ADVICE IS SOUGHT DUE TO THE COMPLEXITY AND VARIATIONS BETWEEN ALL EQUITY RELEASE SCHEMES.