OPINION: Secure a low-cost mortgage while you can
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Future historians seem likely to record that the first quarter of 2022 was a time of significant change.
On the one hand, the pandemic’s once debilitating impact upon our lives has been diluted, thanks to a hugely successful vaccine programme, yet just when many of us believed we were about to emerge into the sunlit uplands and life would return to normal, two unwelcome factors have begun to exert an insidious influence.
Writing several decades hence, historians will doubtless examine the knock-on effects of both factors: Russia’s unwarranted invasion of Ukraine and, closer to home, increasingly rampant inflation.
Aside from shock, the response to Russia’s aggression has crystallised a widespread belief that we cannot compromise our energy security: relying on others for our gas and additional energy supplies simply doesn’t make sense.
The impact of steadily rising inflation is more predictable because, as this column noted back in January, “inflation may be considerably lower than it was, but as it appears to be heading upward again, its effects are no less corrosive”. We can, as a consequence, expect interest rates to continue their upward trajectory, primarily to bring inflation under control.
However, before we get carried away, let’s not forget that inflation is nowhere near the levels it once hit. Many readers will recall that in June 1975, Chancellor Denis Healy had to contend with an official inflation rate that touched 23%. As wage demands soared, the unofficial rate reached 30%. Nor, for that matter, are interest rates hovering at outlandish levels – the Bank of England may have doubled the Base Rate last month, but only to 0.5%.
Nonetheless, a number of financial institutions have reacted to the volatile situation in eastern Europe and the prospect of higher inflation at home by withdrawing several ultra-low interest rate mortgage deals. The moves have prompted mortgage market commentators to suggest that this could be an ideal time for people to fix their interest rate for as long as they can in order to insulate themselves from future rate rises.
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A similar argument could apply to people aged 55 and above who might be considering accessing a proportion of the ‘hidden’ wealth accumulated in their homes, usually over many years. Indeed, the rate at which this wealth has accrued during the pandemic could be interpreted as a particularly dazzling silver lining.
Earlier this week, Halifax reported that the UK housing market was the strongest it had been since 2007 as average property prices rose by 10.8% in the year to February. Since the pandemic arrived in the UK in February 2020, average property values have risen by 16%, increasing the value of an average home by £38,700.
Not surprisingly, the combination of soaring property values and low interest rates continued to stimulate interest in the UK’s equity release market which also performed impressively last year. According to the Equity Release Council, the amount of ‘hidden’ wealth homeowners withdrew from their properties in 2021 reached a three-year high of £4.8bn.
Moneyfacts recently reported that average interest rates have increased to 4.33% from a record low of 3.86% in March 2021. Though average equity release interest rates have edged higher over the past 12 months, it is still possible to secure rates as low as 3.0% Monthly Equivalent Rate (3.26% typical APR).
There is certainly plenty to choose from: the number of equity release mortgage products has risen dramatically, increasing almost seven-fold over the past five years.
“A number of factors have combined to drive demand for equity release,” says Mark Gregory, CEO of Equity Release Supermarket, the UK’s largest independent provider.
“As property values have risen, older homeowners have grown increasingly conscious of the fact that they could use their enhanced property wealth for a variety of reasons, from funding retirement to accessing additional cash, which is tax-free, to alleviate the rising cost of living.
“Other homeowners consider equity release the most appropriate means of passing an inheritance to their offspring much sooner than they may have anticipated, while many use the funds to help loved ones get on the property ladder themselves.
“In short, not only do homeowners enjoy a huge choice of equity release products, they’re still available at extremely competitive rates.”
During uncertain times, demand for certainty increases exponentially, which goes some way to explaining why older homeowners are happy to secure the release of equity from their homes. They do so in the knowledge that they can still lock into comparatively low interest rates – for life.
For more financial advice, check out Peter Sharkey’s regular blog, The Week In Numbers.