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Equity release rates drop below 6pc as homeowners raid properties for cash

Equity Release
Equity Release

Equity release rates have dropped below 6pc for the first time in more than a month as older homeowners cash in on their properties during the cost of living crisis.

Lender More2Life has launched a lifetime mortgage at a rate of 5.94pc – significantly lower than its competitors, whose rates range up to 8.15pc.

Mortgage brokers have called the sub-6pc rate a “turning point” for new equity release borrowers, who have suffered the same interest rate rises as the conventional mortgage market in recent months. However increased competition in the market has driven down rates, experts said.

A lifetime mortgage gives homeowners access to the wealth locked up in the value of their property, while allowing them to remain living there. The loans are repaid when the borrower dies or moves into long-term care.

Stuart Powell, of broker Ocean Mortgages, said: “This is the first time an equity release rate has been below 6pc since the chaos of the mini-Budget.

“It will definitely give borrowers considering equity release a bit more confidence. Hopefully the new normal will be rates between 5pc to 6pc going into next year.”

It comes as brokers have reported a surge in homeowners turning to equity release as household finances have been squeezed.

One in five homeowners who took out a loan in the first half of this year did so to cover soaring bills, according to equity release lender Canada Life.

Mr Powell added: “A huge number of over-55s will not have enough money to cover basic bills in the coming months and the choice between heating or eating will be a reality for many.”

Paul Neal of Missing Element Mortgage Services, another broker, said using equity release to shore up finances had become increasingly common this year.

Mr Neal said: “Parents are taking equity release to bolster their own income, and not just to help a child onto the property ladder, as pensions aren't cutting it given the increases in the cost of living and soaring energy prices.

“Equity release is a double-edged sword and needs careful consideration, as it will erode the equity in your property and eat away at any inheritance left for your children.”

Equity release can be a much-needed lifeline for those in need of a large cash lump sum, but the controversial loans are not suitable for everyone.

The loans can be hugely costly in the long run and borrowers risk losing the entire value of their home to their lender because of the way interest is rolled over and added to the original debt.

The Telegraph has spoken with homeowners whose relatively small loans, or those of loved ones, have snowballed into debts worth hundreds of thousands of pounds.

Reader Service: Do you know how to find competitive equity release interest rates? Learn more about how equity release works