Rising interest rates ‘typically bad news’ for equity release

As living costs rise, many Britons have been exhausting options to free up more cash. While homeowners with mortgages typically look to do this through equity release, today’s economic climate may not make for the best environment to do so, experts have said.David Ingram, founder of MyLocalMortgage said: ‘Unfortunately, an increase in broader mortgage rates is typically bad news for those over 55s looking to do equity release.’There are two key reasons; firstly the rates for lifetime mortgages, the most common form of equity release mortgage, are directly linked to the wider market, so the borrowing rates have been increasing in line with residential mortgage rates.”Interest rates for these mortgages have increased from around four percent at the beginning of the year to around seven percent now, according to Richard Dana, founder and CEO of family mortgage broker Tembo.Mr Ingram said: ‘This means that a borrower taking out a lifetime mortgage in the current market will be paying a much higher interest rate than they would have done over the last few years.READ MORE: Woman misses out on buying first home after ‘bank deletes account’ Rising interest rates ‘typically bad news’ for equity release deals – 3 key considerations (Image: GETTY)’This has a particularly costly effect on lifetime mortgages, as the interest rates continue to accrue and compound until death (or the last borrower moves into long-term care), meaning the final repayment amount due can be disproportionately large compared to the original amount borrowed.’Mr Ingram continued: ‘The second key issue is the forecasted impact that rising interest rates will have on property prices, with major banks estimating a correction of seven percent to 10 percent over the next two years.’The two major equity release methods; lifetime mortgages and home reversion schemes, rely on a valuation of the property. For borrowers looking to release equity from their home based on a higher expected property valuation may be disappointed if this price correction happens and their property is assessed to be of a lower value.’However, some may still find it a good option to explore, but there are a few key considerations people can take when assessing the deal.DON’T MISS:Mortgage meltdown – 400,000 will struggle to pay [INSIGHT]Martin Lewis shares ‘simple rule’ for paying off mortgage [EXPLAINED]Half of Britons fear not having enough money to pay bills [ANALYSIS] The Bank of England has boosted its Base Rate seven times this year so far (Image: EXPRESS)Equity release is a complex product with risks attached for the customer, making it crucial to seek impartial, expert advice from a qualified financial adviser.Mr Stubbins said: ‘[A financial advisor] will be able to provide you with all the information you need on whether it’s the right route for you to unlock the funds you need, or if there are alternative products out there that suit your needs much better.’Make sure that any products are provided by firms regulated by the Financial Conduct Authority (FCA).”