Money’s too tight NOT to mention
The UK is currently enduring its worst cost-of-living crisis since the late 1970s. A concurrent boom in equity release enquiries suggests indebted older householders are seeking financial respite from their property wealth.
But will this trend continue, and how should the industry react to the rise of debt mitigation in later life?
Debt in later life
According to research commissioned by more2life, the total debt owed in the UK by those 55 and over will rise from £272 billion in 2021 to £294 billion this year, before reaching £402 billion by 2032.
Unsecured debt alone is expected to rise by over a third (34%) in 2022. Credit cards are playing a major part in this growth, with a typical balance for older borrowers standing at £2,800.
As a result of the current economic situation, many more households will be using credit cards to cover short-term or even daily living expenses. more2life’s research showed that 39% of retired households said their monthly expenditure exceeded their income at least sometimes in 2022, up from 16% in 2021.
The cost of credit in a volatile market
For those who depend on this type of borrowing, a further debt shock looms with credit card interest rates hitting a 24-year high last month. This is especially concerning given that 22% of over-55s (4.7 million people) said they had credit card debt in the past five years which they hadn’t paid off in full each month.
Data from comparison site, Freedom Finance, shows average interest rates on credit cards stood at 21.66% in July; an increase of 0.23 percentage points since June and the highest since December 1998.
And it’s not just unsecured debt that is squeezing finances. Those with outstanding interest-only mortgages who are stuck on their lender’s Standard Variable Rate (SVR) are also experiencing a rise in repayments. The average SVR is now at over 5% - its highest rate in more than a decade.
Remortgage deals for older borrowers can be few and far between. And even those deals that are around can disappear very quickly, with the average lifespan for mortgage rates standing at just 17 days in July, according to Moneyfacts UK Mortgage Trends Report.
Little wonder, then, that a significant shift in consumer behaviour is being reflected in the statistics and trends emerging from the latest equity release data.
A shift in consumer behaviour
Equity release borrowing for the first half of 2022 stood at over £3.1bn. A record in itself, but also an indication that the market will, for the first time, break through £6bn of total annual lending - as the second half of the year tends to outperform the first (at an average of about 15% over the past five years).
Though some of this resurgence is no doubt a release of pent-up demand caused by the pandemic, statistics from Key’s Market Monitor show that when it comes to what these funds are being used for, consumer behaviour is clearly being skewed and influenced by the wider economic backdrop.
In the first half of 2022, 40% of equity release funds released were used for mortgage repayment, up from 27% in the equivalent period in 2021. More people also cited the repayment of unsecured debt as a reason for taking out equity release in H1 2022 - 30% versus 12% last year. Although, the average amount of funds used for this purpose was down year-on-year.
Younger borrowers were also more likely to be using equity release for debt repayment – 67% of those aged 55-64 compared to 55% of those aged 65-74.
There are other clear indicators of financial reliance on equity release, too. Not only are average new lending case sizes up to over £100,000, but demand for drawdown from existing facilities and further advances is also increasing. more2life saw an increase of 30% on further advance requests last year. Across the market, further advances rose 25% compared to 2020.
While this shift from discretionary spending towards more needs-based is something we’ve seen in the past, the unusual and extreme circumstances facing consumers over the coming months, especially those on limited or fixed pension incomes, should be a warning flag for all those involved in the delivery of later life advice and lending solutions.
Spotting vulnerability and the importance of expert advice
Consumers facing financial hardship are more likely to be vulnerable – perhaps for the first time in their lives. That means they could be susceptible to making poor financial decisions, especially when it comes to borrowing.
Using up a drawdown facility very quickly or coming back for a further advance within a short timeframe from the original loan, for example, could be indicators that a client is in financial distress.
It’s therefore more crucial than ever that consumers seek out expert advice before committing to a course of borrowing that could sacrifice short-term gain for costly long-term consequences. It’s also important that advisers remain alert to the signs of vulnerability when recommending later life borrowing.
As a nation, we’re not renowned for being open and honest about personal finance. But with an exceptionally tough economic outlook ahead, now is not the time for people to be coy about their later life finances.
Housing wealth can provide financial security and surety for those otherwise facing difficult and unpalatable lifestyle choices. And with so many later life lending options available, the only sure way to find the right solution is with the help of a financial adviser qualified to recommend the most appropriate course of action.
