Equity release adviser Prab Singh at 55 Plus, reflects on what higher rates mean for the industry and how we might mitigate them.
In the current climate, where interest rates are approximately double what they were last year, understandably, clients are more hesitant and reevaluating their needs and the timing of when to apply.
However, hoping that interest rates will return to around 3% is unrealistic at this present moment in time, although interesting times we are currently living in. I believe clients will adjust and climatise to the new norms of current interest rates in time, as the realisation of higher than previous interest rates in the financial markets as a whole; sets in. Many clients will have some needs that have to be addressed sooner rather than later, time is not a commodity that can be brought, so remedial action may be required or forced upon them as in the case of an interest-only mortgage term expiring beyond any grace period already given.
There have been some positive movements in the last few weeks of interest rate reduction, we are beginning to see more equity release plan rates starting with 5%, although the markets are still volatile.
Encouraging clients to service the interest or at least make some repayments towards the interest, if their situation allows, is certainly a conversation worth having to reduce the compounding effect of higher interest rates. Understandably, this will be dependent upon the client’s disposable income and their willingness to use such income for this purpose.
There are many benefits for clients to service some if not all the interest chargeable. It will not only benefit the estate and its beneficiaries but potentially the clients themselves in that it is more possible they can access further funds if required in the future. Especially if their circumstances change, for example, a drop in income due to the death or long-term care of one partner. Or maybe the possibility of refinancing to a better plan or interest rate in the future.
However, I believe lenders can help in this regard. Currently, most equity release lenders have an overpayment feature that allows clients to repay 10% of the original loan balance. In the previous years, this 10% limit was ample when interest rates were 3%, clients had a 6-7% gap, which could go towards repaying the capital down quickly if desired.
However, in the current climate where interest rates are on average hovering around 6% or even higher, this does not leave a lot of headroom to make overpayments. I feel this flexible overpayment feature should be increased to at least 15% per annum of the original balance but appreciate it takes time to make such adjustments.
I don’t feel lenders should be worried that the vast majority of their clients will suddenly start to overpay on their lifetime mortgage, but it will give great comfort to all clients that this option is available. Especially for clients who are in a position and want to make such overpayments and have the ability to do so, without incurring any early repayment charges up to this limit.
This flexible feature would enable clients to greater offset the higher interest rates to allow them to feel more comfortable and in control of the compounding effect. I believe this would be a positive talking point and feature when discussing equity release plans in the current climate with clients.
*Views of contributors are not necessarily shared by the Council
