The horrific war in Ukraine is already having repercussions for the rest of the world. As core staples like grain, animal feed, cooking oils, gas and electricity are hit by soaring prices – along with higher taxes as the UK recovers from the pandemic lockdowns – we are seeing the impact of inflation on our interest rates. And that will have a knock-on effect for anyone who is borrowing money. Albeit still only 1%, the UK base rate is now at a 13 year high.
Those under the age of 40 will never have known high interest rates, as rates have been phenomenally low in recent decades.
An interest rate as low as 3% would once have been unimaginable.
Those of us who lived through the early 1990s will well remember the pain of rates that seemed to rise on a monthly basis – fleetingly reaching a shocking all-time high of 17% overnight as we crashed out of the ERM.
Nobody is suggesting that rates will reach those giddy heights any time soon – and we all hope it will never happen – however we cannot ignore the fact that rates are on the move.
Borrower beware…
Every time the Bank of England raises its rate by 0.25%, your bank will most likely raise its rate for borrowers by 0.4% (but perhaps by just 0.1% for savers).
Will this affect the Equity Release market? Unfortunately, yes. No area of the financial market is immune from the vagaries of inflation.
The good news is that these ‘lifetime mortgage' loans have interest rates that are indeed fixed for your entire lifetime. You can rest assured that the interest you're charged on the first day of your loan will never change – and that makes it much easier to plan your budget going forward.
And although Equity Release interest rates are starting to creep up, they are still historically extremely low.
Decisions, decisions…
How could this influence your decision to borrow? Should you take the maximum loan available to you now – or is it wiser to hold back?
While you may be able to access up to 55% of the wealth in your home, it is important to be realistic about the amount you really need. You may not need to borrow such a large sum. But it's also worth thinking about how things could change for you in the next few years.
If you borrow say 5% now, the interest accruing on that sum will be at a rate that never alters. This means you can calculate exactly how much will eventually have to be repaid at any given time on the sale of your house.
But if you borrow 5% now, and then decide to borrow a further 5% in 24 months' time, your second loan will be subject (for life) to whatever the interest rate happens to be at that time.
You will also need to weigh up the cost of accruing interest over a longer period if you take a higher sum out at the outset. It is a balancing act.
None of us has a crystal ball, so we don't know how quickly interest rates will climb – but we do have enough knowledge to understand that they're sadly not going back down any time soon.
Deciding whether – and how much – to borrow requires a lot of considered thought, and that is why Equity Release is only available through a qualified adviser. You cannot just buy it like most other financial products. Taking an Equity Release loan is always a fully advised process.
Always seek an adviser who is a member of the Equity Release Council.
I am here to answer your questions, and my initial chat is always free of charge. Do get in touch for more information.
