The world of mortgages and equity release saw a shift in 2023, marked by a substantial reduction in activities. As interest rates climbed, borrowers and financial advisers across the UK adopted a more cautious stance, significantly impacting the equity release market. This cautious approach, influenced by the rising interest rates, has led to a notable decrease in both the number and size of loans being taken out.
Equity Release Market Reverts to Pre-2018 Levels
According to the Equity Release Council, the total equity release lending for the year 2023 was approximately £2.6 billion. This figure is a stark contrast to the record-breaking £6.2 billion in 2022, bringing the market back to the activity levels last observed between 2016 and 2017. The average amount borrowed by new customers in the last quarter of 2023 dropped to £79,484 from £106,917 in the previous year, indicating a trend towards smaller loans. This shift is primarily attributed to borrowers’ efforts to manage their exposure to the rising interest rates more effectively.
Fewer People Opting for Equity Release
The trend of caution and reduction is further evidenced by the total number of new and returning equity release customers. The fourth quarter of 2023 saw only 13,651 customers, a decrease from 17,078 in the third quarter and 20,597 in the fourth quarter of 2022. Over the entire year, there were 64,448 active customers engaging in new plans, utilising drawdown reserves, or extending existing plans. This number represents a 31% decrease from the 93,421 active customers in 2022.
Shift in Preference Towards Drawdown Lifetime Mortgages
2023 witnessed a significant shift in customer preference, with 53% opting for drawdown lifetime mortgages. This trend reverses the previous year’s preference for lump sum lifetime mortgages, which accounted for 52% of new product sales in 2022. Drawdown plans offer more flexibility, especially in managing higher interest rates, as interest is only applied when money is withdrawn. If interest rates fall, future withdrawals could potentially be charged at a lower rate, making this an attractive option for customers.
David Burrowes, Equity Release Council Chair
David Burrowes, chair of the Equity Release Council, said, “Every corner of the mortgage market saw rising interest rates put the brakes on activity in 2023, and equity release was no exception with customers and their advisers taking a cautious approach. This resulted in loan sizes shrinking and fewer people borrowing for more aspirational reasons. While we’ve grown accustomed to stronger demand in recent years, we shouldn’t lose sight of how far the market has matured since activity was last at these levels. New product features and customer protections mean we are well positioned to serve the inevitable demand that will come as confidence returns. Council standards represent the pinnacle of protection for older consumers, which makes it crucial for them to seek out a member firm when exploring their options.”
Stephen Lowe, Just Group
Stephen Lowe, from Just Group, acknowledged the challenges faced by the equity release market in 2023, “Today’s figures show what a tough year the equity release market has endured, particularly after the strong Covid-rebound in 2022 that broke all records. While existing borrowers were protected by fixed rates, the continued ratcheting up of the Bank of England interest rate to 5.25% in August was always going to make people cautious about new borrowing. Looking forward we have grounds for optimism as the dust settles. Expectations are that the bank rate has close to peaked and lifetime mortgage rates have been falling in recent months. It may take a while for that to show up in lending figures as people remain cautious and wait for the right moment. The bigger picture is still positive for the market. Homes are a vast reservoir of wealth for the over-55s. Population projections last week showed that the population of over-85s in the UK is expected to rise from about 1.6 million to 2.6 million by 2036. It is inevitable more will be looking for ways to supplement their pension income, improve their homes, or gift money to children.”