18 October 2023
Mortgage capital repayments at record high as borrowers adjust to higher rates
- More than £21bn of mortgage capital is being paid off per quarter via regular repayments or overpayments, up from £17bn before the pandemic
- New lifetime mortgage customers reduced their loan sizes in H1 2023, despite the average home holding over £222,000 of equity
- Keeping up voluntary partial repayments of £2,500 per year could save the average lifetime mortgage customer nearly £70,000 over fifteen years
UK mortgage holders are repaying record amounts of mortgage debt in the higher interest rate environment, according to the Equity Release Council’s Autumn 2023 Market Report.
But high levels of debt and a lack of pension savings make it increasingly likely that homeowners will need to borrow against the value of their properties in later life to make ends meet.
The Council report explores the impact of higher interest rates on the lifetime mortgage and wider mortgage market during the first half of 2023.
It shows regular and one-off capital repayments across the mortgage market have totalled more than £21bn per quarter since Q4 2022, according to official data, up from £17bn before the pandemic*.
Total UK mortgage debt remained stubbornly high at £1.63tn in mid-2023. Despite this, the average home contains equity of £222,526: significantly more than the average pension**.
Lifetime mortgage customers show signs of caution
Among older homeowners already using lifetime mortgages to release equity from their homes, the Council’s data shows a shift in borrowing patterns during H1 2023.
Compared with a year earlier, the average new lump sum or drawdown lifetime mortgage customer withdrew a smaller amount of money and a smaller percentage of their overall housing wealth.
As well as a sign of customer caution, this has also resulted from lower maximum loan-to-values (LTVs) as providers have adjusted to higher interest rates.
Table 1: How new lifetime mortgage borrowing has adapted to higher interest rates
|Lump sum lifetime mortgages||Drawdown lifetime mortgages|
|H1 2022||H1 2023||H1 2022||H1 2023|
Source: Equity Release Council data
The Council’s data also shows customers continued to use the flexibility of voluntary penalty-free partial repayments when they can afford to. The average partial repayment was £2,527 in H1 2023.
If a new customer with a loan of £100,000 made this repayment every year over a 10-year period, they would reduce their borrowing costs by £37,845. Over 15 years, they would save £69,305.
All products that meet Council standards allow new customers to make voluntary partial repayments with no early repayment charge (ERC), typically up to 10% of the loan per year.
Table 2: How voluntary partial repayments can reduce lifetime mortgage costs
|Cost without voluntary repayments||Cost with voluntary repayments||Saving with voluntary repayments|
Source: Equity Release Council analysis based on a loan of £100,000 at a rate of 7%
Lifetime mortgage rates have remained competitive
The lifetime mortgage market has not been alone in feeling the impact of higher interest rates. Data from Moneyfacts Group plc shows the uneven effect of rate rises has actually reduced the gap between lifetime and residential mortgage rates.
Ten years ago in 2013, the average lifetime mortgage rate was almost 3% higher than the average fixed rate residential mortgage. For most of 2022, the gap was more than 1.5% compared with the average two-year or five-year fixed rate mortgage.
Over summer 2023, this rate gap fell to less than 1% versus five-year products and less than 0.5% versus two-year products. While the trend reversed slightly during September 2023, lifetime mortgage rates have remained more competitive in relative terms than they were just a year ago.***
David Burrowes, chair of the Equity Release Council, said:
“The equity release market has shown a strong resolve to keep an important lifeline open to customers during a challenging period for the UK economy. People are taking smaller loans and a smaller percentage of their available equity. However, the stark outlook for people’s pension prospects means property wealth will remain a vital part of the equation to avoid a cost-of-retirement crisis.
“While mortgage pricing has jumped across the board, lifetime mortgage rates have weathered the storm better than some residential mortgages. The security and flexibility enshrined in Council standards include the ability to make voluntary partial repayments without the threat of their home being repossessed if repayments become unaffordable.
“Even before the current cycle of rising interest rates, many homeowners were facing the reality of carrying mortgage debt into later life. That is even more likely now, which is why we must double down on our work with industry and regulators to ensure all homeowners understand all their options and make the right informed choices.
“We are completely focused on ensuring that customers receive the right advice at the right time so they can make well-informed decisions, in line with the Consumer Duty. No-one should turn a blind eye to equity release as an option for their later life financial planning, and it’s important they work with Council members to weigh up its practical benefits against all potential alternatives.”
Notes to Editors
* Equity Release Council analysis of data from the Bank of England
** Office for National Statistics, Pension wealth: wealth in Great Britain, January 2022
*** The Market Report sets out a number of design differences between lifetime and residential mortgages which are factors in the different pricing of these products. Additionally, the maximum LTV available to equity release customers is determined by applicants’ age, rather than the relationship between the property value and deposit size which is used for residential mortgages. The lifetime mortgage market offers lower maximum LTVs to customers than for residential mortgages, related to repayments being optional and interest otherwise rolling up over the duration of the loan.
About the Autumn 2023 Market Report
The Equity Release Market Report is designed and produced by Instinctif Partners on behalf of the Equity Release Council. It uses aggregated data supplied by all active provider members of the Council to create the most comprehensive view of consumer trends and product uptake across the equity release industry.
The latest edition was produced in Autumn 2023 using data from new plans taken out in the first half of 2023, alongside historic data and external sources as indicated. All figures quoted are aggregated for the whole market and do not represent the business of individual member firms.
The Equity Release Council is the representative trade body for the UK equity release sector with more than 750 member firms and 1,900 individuals registered, including providers, funders, regulated financial advisers, solicitors, surveyors and other professionals.
It leads a consumer-focused UK based equity release market by setting authoritative standards and safeguards for the trusted provision of advice and products. Since 1991, more than 650,000 homeowners have accessed £46bn of property wealth via Council members to support their finances.
The Council also works with government, voluntary and public sectors, and regulatory, consumer and professional bodies to inform and influence debate about the use of housing wealth in later life and retirement planning.
For more information:
Email Instinctif Partners at [email protected]
Phone Libby Wallis and Andy Lane on +44 (0) 207 457 2020