“If that figure matches what they owe, they can use this to replace the debt,” Johnson explained.
“You can service mortgage debt, pay part of it, overpay it, or not pay it. We do get people who cannot release enough to repay that debt though.”
Comparing today to previous market crashes
A silver lining today which was absent back in 2008 is that advisers can better predict exit penalties for their clients.
Exit penalties used to be based on gilts, but now they are fixed with early repayment charges.
“There’s more chance of us getting them out of it. If rates are higher, exit fees are lower,” Johnson explained.
But there are also drawbacks to today’s environment. CIExpert and Highclere Financial founder, Alan Lakey, said the new problem the mortgage industry is facing is that unlike the previous hikes in 1981 and 1991, for 14 years borrowers have enjoyed historically low rates.
“Many borrowers will have believed this to be normal, when it was anything but,” said Lakey.
“Lifetime mortgages can solve the problem for some borrowers, as long as their loan-to-value enables them to borrow sufficiently.
“Obviously the rates are much higher now, 8 per cent and the like, and as they are fixed for life with a minimum eight-year early repayment penalty period, they will likely find - in the short-term at least - that the amount owed outstrips house price inflation.
“Equity release is not a solve all product, but it can provide respite for many borrowers whose incomes are not sufficient or suitable for standard borrowing.”
The expected drop in house prices could have an impact on people taking money out of equity release products in future, Johnson predicted.
Credit Suisse has predicted they could fall by as much as 15 per cent, alongside a rise in unemployment.
Morgan Stanley also said mortgage affordability “could be worse” now than it was before the great financial crash in 2008, despite lenders having underwritten loans at a “higher quality” since then.
First-time buyers have already seen the amount they can borrow dip by as much as 30 per cent in the year-to-date, as banks have tightened their mortgage affordability calculators in the face of rapidly changing rates.
ruby.hinchliffe@ft.com
