The equity release sector saw a drop in activity during the first quarter of 2023, as the market reacted to the higher interest rate environment, figures from a trade body revealed.

According to the Equity Release Council’s (ERC’s) Q1 report, the number of new and returning equity release customers fell by 19 per cent to 16,691 from 20,597 in Q4 2022. This was also a 29 per cent drop on the 23,395 customers a year earlier.

The ERC said this was the lowest number of customers since Q1 2021.

Total lending reached £699m, which the ERC said made the period the “quietest” since the second quarter of 2020, when the mortgage market was effectively shut down due to the Covid-19 outbreak and £698m was withdrawn.

Simon Gray, managing director at equity release advisory firm HUB Financial Solutions, said: “Market conditions have changed markedly in the last six months and potential new customers are quite rightly assessing their options carefully.”

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New customer trends

The number of new plans agreed during the period came to 6,766, a 39 per cent decline on Q4 2022 when there were 11,174 new plans. This was also 44 per cent lower than the same period a year earlier.

Activity in February was particularly muted, and only 2,026 new borrowers came to the market. This was a 14 per cent drop on the month before and the market recovered in March with 2,384 new borrowers.

There was an almost even split between product choice, as 51 per cent of new borrowers selected a drawdown lifetime mortgage and 49 per cent went for a lump sum.

Loan sizes fell as interest rates rose. The average first withdrawal from a new drawdown plan was £61,785 which was 34 per cent lower than last year. This was also the smallest loan size recorded since Q2 2017, despite house prices rising 30 per cent over this period.

The average lump sum also fell, with a 22 per cent annual drop to £102,405.

Existing borrower activity

The ERC said the only part of the market to see growth in Q1 was across the existing drawdown borrowers, as this rose by nine per cent compared to Q4 2022. It attributed this to interest rates being fixed or capped at the point of withdrawal, as per ERC product standards.

Annually, however, existing drawdown borrower numbers were 18 per cent down.

Returning customers were also conservative in their borrowing amounts, with the average drawdown coming to £13,345 which was a six per cent decline on the previous quarter.

The number of further advances or extensions agreed on existing plans fell for the second quarter in a row. There was a seven per cent fall to 2,193 from Q4 2022 to Q1 2023.

David Burrowes, chair of the ERC, said people had to adjust to the “realities of a higher interest rate environment” and the equity release market was “no exception”.

However, he said decreasing rates and returning appetite suggested there was a recovery.

Burrowes added: “Suitability and timing are everything when it comes to deciding to release equity. For some, it has made sense to continue with their plans. Other would-be customers have evidently been biding their time to see what interest rates do next.”

Market challenges

Industry figures said the market’s performance suggested that equity release had been through a challenging period.

Kay Westgarth, director of sales at Standard Life Home Finance, said some borrowers were adopting a wait and see approach.

She added: “This impact is clearly seen in Q1 2023 but we do believe that, given the strong underlying customer demand and innovation seen across the market, subsequent quarters will see stronger lending volumes.

“This innovation is key to supporting a wider range of customers with diverse needs.”

Sadna Zaman, proposition development manager at Canada Life Home Finance, said: “Even though the market remains subdued, we, as an industry, must continue to highlight the role property wealth can play as part of holistic retirement planning.”

Paul Glynn, CEO of Air, said while it was inevitable that Q1 would be a “difficult period”, there were signs of green shoots in the market.

He added: “Rates have started to come down, loan to values are improving and customers are more aware than ever about the benefits that the flexible nature of equity release products can provide.”