Capital-released mortgage rates reach their highest level in six years with an average interest rate of 5.63%

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The average interest rate on capital-released mortgages has hit a six-year high, new figures show.

The typical rate is now 5.63%, according to data from financial news service Moneyfacts – a rise of more than 1.5 percentage points since the start of the year.

Equity release allows over-55s to tap into the value of their home to help fund retirement, home renovations and early inheritances, and its popularity has grown as rates have fallen in recent years and that offers have become more flexible.

In January 2022, the typical Equity Release customer was only paying 4.10% interest.

Rising rates: the amount of interest paid on mortgages with capital release increases

This is the first time that rates have exceeded 5% since April 2019.

Today’s rates bring the interest paid down to just over a percentage point of the rates paid ten years ago in July 2012, which averaged 6.69%.

However, those who decide to use equity release today have many more options. While in 2012 there were only 35 products available, today there are 631 to choose from.

Similar to those wishing to remortgage their home in the traditional mortgage market, it is also possible to transfer a capital release product to another agreement and lender.

Those who have purchased equity release plans in the past may still find it possible to save money by switching to their current rate.

Those who took out loans more than ten years ago can have rates as high as 8%, for example.

While the average rate in the market today is 5.63%, there are still packages available with rates as low as 3.5%.

Rates generally increase depending on the amount of money you wish to withdraw from your property.

Those considering releasing equity can check the latest available rates and compare offers using the new This is Money and Age Partnership+ tool.

Example rates for an equity release of around £75,000, based on a £200,000 home
Vendor To plan Amount of the loan Assess Cash back
pure retirement Legacy Max Plus Lump Sum £74,630 4.64% £1,630
Scottish widows LS11 £75,200 4.7% £600
Just J3 Fixed lump sum ERC £74,600 4.7% £0
pure retirement Flex 2 (G) Classic Lump Sum Payment £76,500 4.74% £0
Plus 2 Life Flexi Choice Max 5 (free) £77,000 4.89% £0
Fees may apply

The rise comes as standard mortgage rates rise across the board, following five successive Bank of England base rate hikes.

Since December 2021, the rate has increased from 0.1% to 1.25%.

However, the rates for equity release mortgages are higher than those for standard home loans due to the added risk incurred by lenders.

Equity release releases the accumulated value in someone’s home, allowing them to access it in the form of tax-free money.

It can be accessed as a lump sum or a direct debit, where the borrower withdraws money in installments as they choose.

This reduces the overall interest paid, and in the first quarter of 2022 a majority of new customers (54%) chose withdrawal plans rather than a lump sum payment option, according to the Equity Release Council.

The money can be used to increase income, fund home improvements or for other purposes for people over 55.

The loan is then repaid through the sale of the property when the last surviving borrower dies or enters long-term care.

Interest does not have to be paid on loans with capital release and it can be compensated on death. However, as interest increases it can eat away at a substantial portion of a home’s value and therefore some offers offer the option of paying off interest to protect inheritances.

The new plans also offer the borrower the option of making partial repayments over the life of the loan, reducing the total interest due – although this is not mandatory.

Interest in equity release still on the rise

Despite rising rates, the number of people opting to use equity release seems to be increasing.

Figures from the Equity Release Council for the first quarter of 2022 showed clients tapped £1.53bn of real estate wealth in total, up 14% from the £1.34bn viewed in fourth quarter of 2021 and up 34% year-on-year compared to the first quarter of 2021.

This was attributed in part to meteoric increases in house prices, which meant homeowners had more equity to access from their homes.

Increased Interest: More and more people are using equity release amid the <a class=cost of living crisis, but they are urged to discuss their options first with family members and qualified advisors.” class=”blkBorder img-share” style=”max-width:100%” />

Increased Interest: More and more people are using equity release amid the cost of living crisis, but they are urged to discuss their options first with family members and qualified advisors.

A total of 76,000 people used the equity release in 2021, including new customers and repeat customers.

This is a 4% increase from 2020, when just under 73,000 customers signed up for new equity release plans, used drawdown reserves or agreed to extend existing plans. .

However, it remains below the peak of 85,497 seen in 2019.

Rachel Springall, finance expert at Moneyfacts.co.uk, said: ‘Retirement plans could be hampered by the rising cost of living and consumers may consider ways to bridge the gap, such as freeing up the wealth tied up in their home.

Interest rate hikes were widespread across the lifetime mortgage industry throughout June 2022. The average interest rate charged rose above 5% and is at its highest level in six years.

“There can be a variety of reasons consumers decide to use their home equity to cover costs, such as debt clearance or funding a shortfall.

“Amid rising interest rates, consumers may feel compelled to take out a mortgage for life, but it is imperative that they seek independent financial advice to ensure it is the right choice for them. and their relatives.

“Owners may find that they can avoid removing the wealth from their property completely, but if this is the most appropriate choice, they should be aware of how capital release works and the impact it has. result.”

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