The pandemic lockdown has restricted the amount of equity released from properties in 2020 even though interest rates fall to record lows.
Equity released from homes was £3.89 billion in 2020 but was restricted by the pandemic lockdown with 72,988 customers down -10% compared to the previous year according to the Equity Release Council.
The value of private property wealth in the UK reached a record £6.08 trillion for the first time thanks to rising house prices due to high demand with 638,820 transactions in the second half of 2020 up 50% on the first half of the year.
Mortgage debt for all private property increased to £1.5 trillion leaving equity of £4.58 trillion and loan to values of 24.6% with average equity of £189,549 for property owners.
The number of new plans agreed was 40,337 in 2020 reducing from 44,870 the previous year and customers returning for further drawdowns were 28,902 in 2020 down from 36,426 a year ago.
Interest rates fall to record lows
The fall in gilt yields due to the pandemic has helped lifetime mortgage rates fall to an average 3.95% reducing the cost of equity release to homeowners.
The table from Equity Release Council shows the change in interest rates for lifetime mortgages every six months from 2016 to 2021.
| Date | Interest rate |
|---|---|
| Jan 2016 | 6.20% |
| Jul 2016 | 5.96% |
| Jan 2017 | 5.45% |
| Jul 2017 | 5.27% |
| Jan 2018 | 5.14% |
| Jul 2018 | 5.22% |
| Jan 2019 | 5.21% |
| Jul 2019 | 4.91% |
| Jan 2020 | 4.48% |
| Jul 2020 | 4.11% |
| Jan 2021 | 3.95% |
Average costs have reduced by 2.25% over the last five years from 6.20% pa to 5.21% pa in January 2019 down to a record low of 3.95% pa January 2021.
If you take out a lifetime mortgage for £50,000 making no repayments for twenty years, the lower rates reduce the interest you owe by £58,010 or 35%.
Homeowners can consider replacing an existing equity release plan taken out five or more years ago as the lower rates reduce interest rolling-up over time improving the chance of leaving equity to your family.
See how to reduce the cost of interest roll-up with lower rates using overpayments to leave more equity to your family at this link:
Free equity release calculator with instant results using interest and overpayments.
The number of equity release plans that offer products with interest rates of 4% or lower has improved from only 7% in January 2019 to 58% in January 2021.
These products include valuable benefits such as no negative equity guarantee, fixed interest rates for life, the right to live in the property for life and no requirement to make capital or interest payments.
Products allow you to make overpayments of 10% free of the early repayment charge (ERC) and above this there are types of plan structures to consider with different costs.
Plans with fixed penalties charge a fixed percentage typically starting at 10% reducing over time whereas a gilt based penalty could have no charge if gilts rise or a very high charge if they fall.
Property wealth borrowing levels are lower
Across most age groups the amount of cash accessed using equity release has reduced slightly reversing a trend of increasing loan to values since 2019.
This is based on rising property values and for new customers taking a lump sum this is £363,232 compared to those using drawdown with higher values of £394,956.
Rising values could be due to a general trend of increasing house prices in the UK property market and also homeowners with higher priced properties releasing cash such as for home improvements of gifting to family.
How much you can access depends on loan to values based on age and for a 60 year old the maximum is 41% whereas the average taken is 25.9% in January 2021 down from 26.3% in July 2020.
Older homeowners are willing to take more using equity release, with an 80 year old the maximum loan to value is 56% and the average cash taken is 46.6% which is a high proportion.
Customers used lump sum plans to take £102,143 in the second half of 2020 or 28.1% of the property value and this could be used to trade-up and buy a dream home in retirement.
For drawdown plans the amount arranged was £110,591 or 28.1% of the property value of which £76,453 was taken initially and a reserve of £34,138 available for future access.
What are your next steps?
Talk to our London City Mortgage advisers if you are buying a new home, we can recommend the lifetime mortgage plan and specialist legal advice relating to the move.
Find out more about the best products and interest rates to consider if you are trading-up to a more expensive property with this link:
Free equity release quote with interest rates to buy a new home.
Our expert advisers can find products to meet your objectives if moving home. Learn more by using the equity release calculator, property value tracker chart and mortgage costs calculator.
