UK Homeowners Battle Debt and Dive into Equity Release

Homeowners across the UK are swimming against the tide, grappling with mounting mortgage debts while cautiously using their properties to unlock essential funds.

According to the Equity Release Council (ERC), the nation’s homeowners are clearing away mortgage debts at a record rate. We’re talking figures that boggle the mind – over £21 billion every quarter since the end of 2022. Just to put it into perspective, before COVID-19 rocked our world, that figure was a ‘mere’ £17 billion.

However, not all is rosy. Despite these impressive repayment figures, the total UK mortgage debt stands tall at £1.63 trillion in 2023. So while the house you’re living in might hold a substantial equity value – averaging at £222,526 – it might also be chained down by significant mortgage debt.

Equity Release: The Lifeline for Many

With concerning levels of debt and lacklustre pension savings, many homeowners are turning to the equity trapped in their homes. Equity release, particularly through lifetime mortgages, offers a way to tap into this wealth without having to sell or vacate the house.

But there’s a twist. Recent data from ERC shows a change in how homeowners are approaching equity release. In the first half of 2023, those taking out new equity release loans withdrew both smaller sums of money and a reduced percentage of their property’s value compared to the previous year.

Diving into the Numbers

For the stats buffs out there, let’s dive deeper:

  • Lump Sum Lifetime Mortgages:
    • H1 2022: Property Value £423,556, Rate 4.00%, Loan £132,085, Loan-to-value 31.2%
    • H1 2023: Property Value £380,087, Rate 6.66%, Loan £98,407, Loan-to-value 25.9%
  • Drawdown Lifetime Mortgages:
    • H1 2022: Property Value £441,270, Rate 3.43%, Loan £134,692 (with £92,580 upfront), Loan-to-value 30.5%
    • H1 2023: Property Value £428,539, Rate 6.28%, Loan £104,443 (with £60,534 upfront), Loan-to-value 24.4%

Source: Equity Release Council data

These figures hint at two key trends: homeowners are being more cautious, and loan providers have tightened their belts, offering lower loan amounts in response to rising interest rates.

Mortgage Rate Rollercoaster

Historically, lifetime mortgage rates were notably higher than standard residential mortgage rates. Just a decade ago, there was almost a 3% difference between them. But the gap has been closing.

Most of 2022 saw this difference hovering above 1.5%. Come summer 2023, it dropped dramatically – to below 1% when compared to five-year fixed rate mortgages and under 0.5% against two-year products. Despite a minor uptick in September 2023, lifetime mortgages still offer better rates compared to last year.

A Word from the ERC

David Burrowes, chairperson of the ERC, expressed concern about the UK’s retirement financial landscape. He highlighted that while homeowners are borrowing less against their equity, the future remains uncertain. With most facing the very real prospect of carrying mortgage debts into their golden years, Burrowes emphasized the need for the right advice at the right time.

He concluded, “Equity release can be a lifeline, but homeowners need to be well-informed and weigh its benefits against all options. Ignoring it might mean missing out on a crucial financial tool for retirement.”

In the ever-shifting world of mortgages and equity, staying informed and seeking professional advice is the key to navigating these choppy financial waters.