Navigating Later Life Lending in a Time Of Economic Challenges and Demographic Shifts

The UK has experienced a shifting economic landscape in recent years. High interest rates and inflation are reshaping our financial reality, alongside an ageing population which is redefining how people live in later life.

But within these challenges lies opportunity – as property wealth outpaces pension savings, equity release is emerging as a powerful tool for later life financial planning.

So what factors are strengthening the case for equity release as a consideration in later life finance?

What’s causing high interest rates?

Recent changes in the UK and global events has had an impact on property values and interest rates which have always been tied to economic conditions. After holding interest rates at 5.25% seven times in a row, The Bank of England has only recently made the first reduction since the Coronavirus lockdown in March 2020. However, a 0.25% reduction reflects that some inflationary measures are higher than it would like.

Key factors influencing interest rates include:

• Inflation: This is the primary driver of interest rate decisions. The Bank of England is focusing on price stability rather than increasing economic strength. It is therefore unlikely that rates will significantly reduce until inflation is under control.
• Low productivity levels: Global events and an ageing population have decreased productivity in the UK, causing supply to drop while demand remains steady.
• Fiscal policy: Government spending and tax cuts have fuelled inflation and led to higher rates. The new Labour government has set out its intention to be fiscally constrained – if that holds, it should help drive rates lower.

Key drivers of UK inflation

As we move through the second half of 2024, the UK economy continues to adjust to the aftermath of global events. But while the rapid rise in inflation we’ve seen over the past few years is beginning to slow, research shows it’s not likely to go back to how things were before the pandemic.

Looking ahead, several big trends are likely to keep prices rising, though more slowly than before. These include:

• Wage growth: This is embedded into our inflationary figures and has significantly contributed to inflationary pressures in the UK, particularly in recent years. Labour market shortages have driven up pay, leading to increased consumer spending and higher prices. Initiatives from the new Labour government may exacerbate inflation through their commitment to a ‘genuine living wage’.
• Low productivity: The UK, along with other developed countries, is facing a shrinking workforce and reduced productivity, this is likely driven by an ageing population, shifting work-life balance preferences, and lifestyle changes following the pandemic.
• Ageing population: As our population gets older, research shows this will likely result in lower productivity – with a less active workforce supply would fall but its expected demand could remain the same.
• Deglobalisation: Rising geopolitical tensions are pushing countries toward deglobalisation, prioritising supply chain security over efficiency – this shift is likely to increase costs and impact productivity.
• Green economy: More countries, including the UK, are moving toward a greener, low-carbon economy which will require substantial investment.
• New technology: While the long-term impact of this will increase productivity, in the short-term the investment into new technology such as AI will likely incur significant implementation costs which will be inflationary.

While it seems that inflation is getting under control, it would be sensible to plan for interest rates and prices to stay higher than we were used to before the pandemic.

It is likely that we’re heading into a ‘new normal’ rather than back to interest rates that were close to zero, as we continue to deal with more persistent inflation and therefore interest rates that are at a higher level than what we’ve become accustomed to. 

Understanding an ageing population

One of the most significant changes in the UK is our ageing population and the fact people are living longer.

In the last 40 years, the number of people aged 50 and over increased by over 6.8 million (a 47% increase), and this trend is expected to continue with over-65s anticipated to grow by 40% in the next 20 years – meaning more people will be heading into retirement.

Because of this, pensioner levels are set to be much higher and productivity is likely to continue dropping. In the 1980s, there were four workers for every pensioner. By 2020, this ratio had dropped to three workers per pensioner. It’s estimated that by 2050, there may be only one worker for each retiree.

But with a recent LV= Wealth and Wellbeing survey indicating that 57% of UK consumers lack confidence in their retirement savings, we know many people may be concerned about financing their later years. This means more customers will likely seek alternative ways to support themselves as they journey through this life stage.

It’s important to consider how society is changing alongside these economic shifts, and what people will need to help them live comfortably and feel financially secure in the years to come.

How equity release could help bridge the gap

In today’s changing economy, advisers will need to take a more comprehensive approach to later life financial planning. As people live longer and face potential retirement savings shortfalls, tapping into home equity could be crucial in addressing the financial needs of an ageing population.

The current generation of over–50s holds an estimated £5 trillion in property wealth, which exceeds the total value of pension funds. This substantial amount of housing equity suggests that property-based solutions, including equity release, should play a key role in later life financial planning discussions.

Despite recent economic challenges, over the past decade, we’ve seen consistent expansion of the later life lending market and even though this growth has recently slowed down, sales in 2023 were still 2.5 times higher than ten years ago.

Equity release is increasingly viewed as an integral part of holistic retirement planning, alongside pensions and savings, allowing people to live comfortably and provide for their families in the future.

As economic conditions stabilise and interest rates drop, we can expect equity release to resurge as a mainstream financial solution for those in later life looking to unlock the value tied up in their home.

Equity release solutions designed for flexibility

The flexibility built into our Lifetime Mortgage ranges enables customers to make the most of their present circumstances while maintaining confidence in their long-term financial plans and security.

Our Lifetime Mortgage Plus and Lifestyle ranges offer fixed early repayment charges (ERCs) as standard and a unique drawdown ERC structure (which calculates the Drawdown ERC term from the initial date of loan completion).

To help manage interest accumulation, customers can make unlimited annual repayments up to 11% on our Lifestyle range and 10% on our Plus range without penalty, with the ERC-free allowance calculated on total advcances (excluding additional borrowing).

With people now living longer after retirement, their circumstances are more likely to change in later life, which is why we offer downsize protection from five years onwards. We also offer inheritance protection on our Lifestyle range, to provide customers with the option to secure a financial legacy for their loved ones.

Visit our website to find out more about LV= Lifetime Mortgages.

If you’d like to find out more about the Equity Release Partners smartER equity release referral service, click here or call the team on 0800 088 5950.

Sources:

Money Age: House prices hugely outpace pension income growth in last decade – Money Age

BBC News: Mortgage rates: How do UK interest rates affect me?

Centre for Ageing Better, Our Ageing Population: The State of Ageing 2023-24

Pension and Lifetime Savings Association: Estimating likely retirement living standards

Pension and Lifetime Savings Association: Pensions and Growth

Office of National Statistics: The changing UK population – Old age dependency ratio (OADR), UK, 1980 to 2037

International Longevity Centre UK: The UK and other ageing populations will have to increase their state pension age to 71 by 2050 to maintain the number of workers per retiree

Savills: Housing wealth held by over 65s hits record high of over £2.6 trillion, according to research by Savills

LV= Wealth and Wellbeing Research Programme (December 2023)

LV= Economy, property and later life lending webinar (June 2024)