The cost of living crisis, rising inflation, and interest rates are causing many homeowners aged over 55 to explore their financial options.
Later Life mortgage products are becoming an increasingly popular way to access property wealth and fund retirement plans, such as renovations, helping children on the property ladder or cost of living expenses.
However, some Later Life products (such as equity release) still have a somewhat negative perception in the public eye, despite the UK’s Equity Release Council introducing product standards to help ensure good customer outcomes and promote safe equity release.
This article will discuss the viability of Later Life mortgages in 2023 and hopefully dispel some of the misconceptions homeowners aged 55+ may have about borrowing in their later years.
The state of the UK’s Later Life mortgage market in 2023
The Equity Release Council’s Autumn 2022 Report indicates that the popularity of Later Life mortgages has surged, increasing by 40% in Wales, 38% in the North-West and 31% in the West Midlands over the past four years.
This uptick in interest may be due to the extended 14-year period of low-interest rates, which made it more affordable for older homeowners to borrow money against the value of their homes.
However, the COVID-19 pandemic and subsequent cost of living crisis have led to a noticeable shift in borrowing patterns. In the past, UK homeowners may have used Later Life mortgages to fund luxury purchases, such as holidays. But nowadays, many people are more likely to borrow money to cover their general living expenses due to rising inflation – which has seen many people’s household budgets squeezed.
Borrowers are also more cautious about how much debt they take on since interest rates have risen, with many homeowners now more willing to pay towards the interest cost of a Lifetime mortgage to help protect their remaining equity.
This is reflected in the Equity Release Council’s Spring 2023 Report, which found that many new Lifetime mortgage customers are reducing their upfront borrowing and making voluntary penalty-free payments to mitigate the effect of compounding on unpaid interest being added to their loan.
Later Life mortgage myths
There are still many misconceptions about Later Life mortgages, such as losing ownership of their property, the inability to move, and the risk of negative equity. To illustrate, a 2023 survey by Sunlife found that only 6% of over-50s are aware of equity release features that are available for their protection, such as the no negative equity guarantee.
However, The Equity Release Council has done and continues to do exceptional work in promoting safe equity release and high standards of advice for consumers. For instance, today’s Lifetime mortgage plans are increasingly flexible, transparent, and heavily regulated.
In addition to the no negative equity guarantee, other key Lifetime mortgage product features include:
- The right to reside for life for named borrowers
- The ability to make voluntary payments up to plan-specific limits without penalty
- Funds released at a fixed rate (or capped, if variable)
- The ability to port your Lifetime mortgage to a new property if it is acceptable to your lender
However, despite these features being included in Equity Release Council-approved plans, it’s still vital to research and speak to a qualified financial advisor before making any financial decisions.
Are Later Life mortgages still viable in a cost-of-living crisis?
The Bank of England adjusted its base rate to 5.25% in August 2023, following a rise in inflation to 7.9% in June. The latest Consumer Price Index (CPI) figures also show that inflation fell to 6.8% in August, suggesting the pace of rate increases may be slowing down.
But, despite these positive economic indicators, borrowers should still be cautious about taking on debt, as interest rates are still relatively high compared to previous years and the economic outlook remains uncertain.
In particular, Later Life mortgage customers should be mindful of how the UK 15-year gilt yield affects the cost of Lifetime mortgages.
The yield on UK Government 15-year bonds (or ‘gilts’) has historically been considered an indicator of long-term interest rates. This is because they are viewed as a low-risk investment with a long maturity, making them a good benchmark for assessing the risk-free rate of return on investments. Most Lifetime mortgage lenders are either insurance companies (or funded by insurance companies) that use gilts to offset their pension and annuity liabilities. Although Lifetime mortgage rates don’t move in lock-step with gilts, lenders use the 15-year yield as a reference point when setting their loan rates.
Gilt yields can change daily, while the Bank of England only meets eight times a year to adjust base rates. This means that, some lenders may increase interest charges on variable rate loans, even if the Bank of England has yet to announce base rate changes. The implication for variable rate borrowers is that they may have to pay more, while they were not expecting their monthly interest payments to increase.
With the uncertainty over interest rates and inflation over the past year ongoing, borrowers of all ages are more cautious, with needs-based objectives now a priority for those in later life. Alternative solutions that may have previously been disregarded are back under consideration.
For Retirement Interest Only (RIO) and Lifetime mortgage customers, this may include:
- Exploring downsizing options
- Checking for any available state benefits or support
- Releasing only the minimum amount of equity for their objectives
Learn more about the Later Life mortgage options available to you
In considering the viability of Later Life mortgages amidst a cost-of-living crisis, it’s essential to keep the bigger picture in mind. Taking the time to assess your needs carefully is vital, as these are long-term financial commitments that may not suit everyone.
For homeowners aged 55+ seeking expert guidance, Henry Danell’s services offer distinct advantages. With a track record of 5-star reviews, Equity Release Council membership, and access to the whole market, we’re your ideal partners in providing tailored advice.
Moreover, our one-time fee of £1,295, payable only upon mortgage completion, ensures transparency and dedication to your financial well-being with no further charge payable if you need additional funds or to remortgage in later life.
Please note: Later Life product options include Retirement Interest Only and Lifetime mortgages. To understand the features and risks, always obtain a personalised illustration.