Hike rates

With almost all lenders raising their rates, is freeing up equity still a good idea in 2022?

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Equity release allows homeowners to access cash tied up in their properties without having to move. Some of the most common reasons for freeing up equity are to supplement retirement income, pay off debt, finance a major purchase, or help a loved one move up the homeownership ladder.

In recent times, the equity release market has seen a resurgence in popularity as real estate prices have soared and the range of equity release products on offer has expanded. But with new data showing that equity interest rates are on the rise, is releasing stocks still a good idea in 2022? We’ll take a look.

What happens with the equity release?

According to an analysis of Money facts, the prices of equity release products have been rising since the beginning of the year. The data shows that all but one of the equity release lenders have raised rates so far this year.

After hitting 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, rising from an average of 4.1% in January. However, the current average of 4.33% is not far from the 4.2% recorded in March 2020.

Statistics 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 agreements, compared to 492 last year. Four of the new additions hit the market in the past two months.

Is Equity Release Still Worth It In 2022?

According to Rachel Springall, finance expert at Moneyfacts, recent developments mean that anyone planning to release money from their home this year will face higher interest charges than someone who did. ‘last year.

It should also be remembered that with equity release, interest is compounded. Basically, the lender charges you interest on both the amount borrowed and the accrued interest from the previous month. So, as interest accumulates, the amount you owe can increase significantly over time.

However, that doesn’t necessarily mean that releasing equity isn’t a good idea in 2022.

In fact, for anyone considering freeing up equity, some positive news has come out recently. This is news that could make releasing stocks a more viable option in the future, regardless of the recent rate hike.

The Equity Release Council (ERC) has introduced new protection that could help prevent equity release interest charges from building up to an unmanageable level.

Starting March 28, 2022, all capital release providers will be required to allow customers to make penalty-free repayments on their loans.

Although some providers have already allowed it, with the new rules it will become the norm in the industry rather than the preserve of a few.

This means that regardless of the provider, all customers will be able to reduce the total cost of their loan (specifically the total interest due) by making partial repayments. This could help offset higher borrowing costs caused by rising interest rates.

What else should you know about equity release?

Equity release is a big decision with many possible consequences. For example, freeing up equity means potentially reducing the amount of inheritance for your beneficiaries. It may 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 advisor can help you determine if equity release is right for you. They can also help you navigate the wide range of products available and find the one that best suits your needs.

Finally, remember that if equity release turns out not to be the right option for you, there are other decent alternatives. For short-term financial needs, you might consider taking out a personal loan or even a credit card.

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