Equity release allows homeowners to access cash locked in their properties without having to move. Some of the most common reasons for releasing equity are to boost retirement income, pay off debts, fund a large purchase or assist a loved one in getting on the property ladder.
In recent times, the equity release market has witnessed a surge in popularity as house prices have soared and as the range of equity release products on offer has expanded. But with new data showing that equity interest rates are on the rise, is equity release still a good idea in 2022? Let’s take a look.
What’s happening with equity release?
According to an analysis by Moneyfacts, the rates on equity release products have been on the rise since the beginning of the year. Data shows that all equity release lenders except one have raised their rates so far this year.
After dropping to a record low of 3.86% in March 2021, rates have risen to 4.33% today. This is the highest rate so far this year, climbing from an average of 4.1% in January. However, the current average of 4.33% isn’t far off from the 4.2% recorded back in March 2020.
The stats also show that the number of products in this space has increased significantly since this time last year.
For example, there are now 665 different equity release deals, compared to 492 last year. Four of the new additions have come into the market in the last two months.
Is equity release still worth it in 2022?
According to Rachel Springall, finance expert at Moneyfacts, the recent developments mean that anyone considering releasing cash from their home this year will face higher interest costs than someone who did it last year.
It’s also worth remembering that with equity release, interest is compounded. Basically, the lender charges you interest on both the amount borrowed and the interest that has accrued from the previous month. So, as interest builds up, the amount you owe can grow significantly with time.
However, it doesn’t necessarily mean that equity release is not a good idea in 2022.
In fact, for anyone considering equity release, some positive news has come out recently. It’s news that could make equity release a more viable option going forward regardless of the recent rate hike.
The Equity Release Council (ERC) has introduced a new safeguard that could help prevent the interest costs of equity release from building up to an unmanageable level.
Beginning on 28 March 2022, all equity release providers will be required to allow customers to make penalty-free repayments on their loans.
While some providers already allowed this, with the new rules, it will become the norm across the industry rather than the preserve of a few.
This means that regardless of provider, all customers will be able to reduce the total cost of their loan (more specifically the total interest owed) by making partial repayments. This could help to offset the higher borrowing costs caused by rising interest rates.
What else do you need to know about equity release?
Equity release is a big decision with a lot of possible consequences. For example, releasing equity means potentially reducing the amount of inheritance for your beneficiaries. It can also affect your entitlement to means-tested benefits such as Pension Credit and Universal Credit.
With this in mind, Rachel Springall advises those interested in equity release to seek professional advice first. An adviser can help you determine whether equity release is right for you. They can also help you navigate the vast array of products available and find the best one for your needs.
Finally, remember that if equity release turns out not be the right option for you, there are other decent alternatives. For short-term financial needs, you could consider taking out a personal loan or even a credit card.
Was this article helpful?
YesNo
About the author
Sean is a personal finance writer with a strong passion for helping others become more financially literate and make better financial decisions. He covers everything from credit cards to savings to investing.
Some offers on The Motley Fool UK site are from our partners — it’s how we make money and keep this site going. But does that impact our ratings? Nope. Our commitment is to you. If a product isn’t any good, our rating will reflect that, or we won’t list it at all. Also, while we aim to feature the best products available, we do not review every product on the market. Learn more here. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Barclays, Hargreaves Lansdown, HSBC Holdings, Lloyds Banking Group, Mastercard, and Tesco.
