Contents
Introduction
If you’ve been following the news, you may have noticed that the Bank of England has cut its base rate several times in the past year. Yet, if you’re considering equity release, you’ll see that equity release (lifetime mortgage) rates remain stubbornly high. Why is this, and what does it mean for homeowners looking to unlock the value in their property?
At Tivoli Legal, we want to empower you to make informed decisions for your future. That’s why this guide explains:
- Why do equity release high mortgage rates remain?
- What factors influence them?
- The steps to take if you need to access your home’s equity now.
Let’s begin with an explanation of how equity release mortgages are funded.
How are equity release mortgages funded?
Understanding the difference between residential and lifetime mortgages
Traditional residential mortgages are typically funded by banks using short-term borrowing and customer savings.
In contrast, equity release mortgages are funded through long-term borrowing. Lenders raise the money they need via government bonds (gilts). Gilts are long-term loans to the UK government, and the interest rates (yields) they pay set the benchmark for the cost of long-term borrowing in the UK.
Key point:
Residential mortgages: Short-term funding, closely linked to the Bank of England base rate.
Equity release mortgages: Long-term funding, closely linked to gilt yields.
What are gilts, and why do they impact lifetime mortgage rates?
Gilts are a type of loan issued by the UK government to investors. When a gilt is bought, this is lending money to the government in exchange for regular interest payments (called the “yield”) and the return of the original invested money at the end of the term.
Whilst age, property value, and health all play a role in determining your equity release interest, so do gilt yields. When gilt yields rise, the cost of long-term borrowing for lenders also increases, and this cost is passed on to lifetime mortgage customers in the form of higher equity release rates.
Generally speaking, equity release rates run at 1-2 per cent above gilt rates, and they can affect early repayment rates too.
Key point: Even if your personal circumstances are favourable, raising gilt yields can still push up the interest rates you’re offered on equity release.
Why are government bond yields keeping equity release rates high right now?
Several factors can keep gilt yields higher and impact equity release rates. Here are some examples:
- High Government Borrowing: The UK government has borrowed heavily in recent years, which has increased the perceived risk for investors and pushed up yields.
- Market Events: You probably remember the 2022 “mini-budget.” This caused sharp increases in gilt yields because financial markets were in turmoil due to concerns over unfunded tax rates; as a result, interest rates increased.
- Global Uncertainty and Inflation: Ongoing global economic uncertainty, persistent inflation, and high UK debt levels make investors cautious, leading to higher yields.
- Tariffs: President Trump’s recent tariffs announcement had a considerable impact on gilt yields, sending them soaring. However, rates declined when Trump backed down.
Key point: Even as the Bank of England base rate has fallen from 5.25% to 4% in the past year, gilt yields remain elevated, so equity release interest rates have not followed suit.
When will lifetime mortgage rates fall? Expert predictions
Now the big question: When will equity release rates come down? Not overnight.
Most experts agree that rates will gradually normalise over the next few years, but it depends on multiple factors that can influence gilts, including:
- A reduction in government borrowing
- Bringing inflation under control
- The UK economy is stabilising and growing
- Global markets become less volatile
- The government fiscal policy
- Investor supply and demand
- New UK budgets or policy changes
- Market conditions and alternative investments
Analysts predict that, rather than a sudden drop, rates will normalise over the next five years as economic conditions improve, but there are no guarantees.
What you can do if you need equity release now: 4 smart strategies
The gilt markets are prone to wild swings, but regardless of the highs and lows, you can take some sensible steps. Here’s how to make the best of the current market:
1. Speak to a whole of market Independent Financial Adviser (IFA): Getting professional guidance is crucial, especially in these uncertain times. An IFA can assess your specific circumstances and determine if equity release is right for you. They can also compare rates from different lenders to get you the most competitive deal. For added protection, choose a product regulated by the Financial Conduct Authority and ensure it’s registered with the Equity Release Council.
2. Borrow Only What You Need: It’s tempting to release the maximum amount available so that you know you have future funds, but remember that interest compounds over time if you are not paying the interest. By borrowing what you need, you will pay interest at the market rate for each drawdown. For instance, if you need £30,000 for home improvements, don’t borrow £50,000 just because you can. Prioritise your most pressing needs first and access more funds later, if needed.
3. Consider a Drawdown Plan: Rather than taking a large lump sum, a drawdown lifetime mortgage lets you take an initial amount, and then access additional funds as needed. This approach offers real advantages in volatile markets as unused funds don’t accrue interest. Also, future withdrawals might benefit from improved rates if gilt yields fall.
4. Be Open to “Re-broking”: The equity release market has become more flexible in recent years. Some lenders now allow customers to switch to better deals without early repayment charges, particularly if rates drop significantly. Your adviser will review your plan periodically to check if better options are available. However, it’s a good idea to ask your IFA for a review if your personal circumstances change. For instance, you may inherit money or develop health issues.
Key point: Equity release rates are driven by long-term borrowing costs—specifically, gilt yields—not the Bank of England base rate. While there’s hope that rates will ease over time, it’s wise to borrow only what you need and to work closely with a IFA who can regularly review your options.
Even though today’s market conditions may feel uncertain, there’s no need to rush or make hasty decisions. By taking a calm, measured approach and seeking the right professional advice, you’ll be better equipped to make choices that protect your long-term financial security.
Frequently asked questions
Why are equity release rates higher than standard mortgage rates?
Equity release rates are based on long-term borrowing costs (gilt yields, i.e. the interest that the government has to pay on loans that they take to fund spending), not the short-term Bank of England base rate.
Will equity release rates fall soon?
Most experts expect gradual reductions over the next five years, not an immediate drop. However, this is dependent on multiple factors, including global events, government policy, and potential budget announcements.
Can I switch to a better rate in the future?
Yes, some plans allow for “re-broking” if better deals become available with no early repayment charge, but all plans allow for re-broking with an early repayment charge. It’s worthwhile getting regular reviews with your IFA, who will do the maths of the costs of redeeming an existing loan (with any penalty charges) compared to a new loan at a lower rate and remember to consult them if your personal circumstances change.
How can I get the best equity release deal?
Work with a regulated, whole-of-market IFA. Ensure your plan is regulated by the Financial Conduct Authority and your IFA is registered with the Equity Release Council. Once you’ve selected your equity release product, you can then book a no-obligation call with our specialist equity release legal team at Tivoli Legal.
Where can I learn more about equity release?
Visit our equity release resource centre for
Conclusion
At Tivoli Legal, we understand that choosing equity release is a big decision. Our warm, caring, and client-focused team is here to guide you, making the process clear, supportive, and stress-free.
Once you’ve appointed an IFA who will help you choose the right later-life lending (equity release) product for your circumstances, we’re here to protect your interests and secure the best possible outcome for your financial future.
Ready to explore your options?
Contact Tivoli Legal today for a no-obligation chat about your circumstances and learn how we can support you.
