Equity release interest rates: How much does it cost?

Equity release is an attractive proposition if you’re looking to access a significant amount of cash and you’re over 55 years old.

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Equity release is an attractive proposition if you’re looking to access a significant amount of cash and you’re over 55 years old. These schemes, however, can at times be expensive and finding a good deal is essential to avoid future headaches. Learn about the benefits and pitfalls of equity release below, and check our tips on finding a great deal.

What is equity release?

Equity release refers to a series of schemes that allow you to extract value from your home without actually having to vacate the property.

This is typically done through two main types of equity release – lifetime mortgages and home reversion plans.

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Home reversion

This type of equity release scheme allows you to sell the whole or part of your house whilst retaining the right to continue living there until you pass away or go into care. Since you are selling your property from the get-go, you won’t have to pay any interest rates; however, the amount you sell it for will likely be less than the property’s actual market value.

Lifetime mortgage

Through a lifetime mortgage, you borrow money from a lender against the value of your property. Typically, applicants seek 15% to 50% of their property, depending on their age and requirements. The lender then applies an interest rate to this loan, which must be paid along with the loan value at the end of the plan. Equity release plans usually end when you either pass away or go into full-time care.

There are different types of lifetime mortgages, each with various benefits. For example, you could opt for a voluntary repayment plan option, which allows you to pay off interest plus up to 40% of the value of the loan amount each year. This ensures that when your plan runs its course, your final payment will be much lower. On the other hand, you could instead opt for a lump sum lifetime mortgage and receive the cash in one go and not make any monthly payments until your property is sold at the end of the scheme.

Who qualifies for equity release?

To access these schemes, you must meet some requirements. For instance:

  • The youngest applicant needs to be at least 55 years old for lifetime mortgages and 65 for home reversion plans.
  • Your property needs to have a minimum value of £70,000.
  • The property must be your permanent residence.
  • You need to borrow at least a minimum amount stipulated by the lender.
  • Be mortgage-free or have a small amount left to clear on your first mortgage.

What are the advantages of equity release?

We compare plans from the leading equity release providers

The primary benefit of equity release is the quick and easy access to cash. This can be an excellent way to gain financial protection if you’re reaching retirement age and are concerned that you won’t have enough to cover your living expenses or make debt payments.

Some applicants also choose to access the funds to buy a second property or help a loved one onto the property market. How you use the money is up to you since there are no restrictions on what the cash can be used for. Another benefit of equity release is that you retain ownership of your property through the lifetime mortgage scheme, and you can keep benefiting from value increases on your property.

How much does equity release cost?

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The cost of your plan will depend on how much you plan on borrowing through the lifetime mortgage and the interest rates you get. The more you want to borrow, the more expensive the loan will be, so ensure that you only get what you need.

As an example, here is a quote estimate to give you an idea of the costs involved with equity release:

  • A 55-year-old applicant with a property valued at £400,000 could access up to £84,000 at 3.2%. This means that the applicant could owe an eye-watering £159,169 at the end of the plan due to interest roll-up.

As you can see, it’s essential to understand the costs involved with equity release schemes. To stay on top of interest and reduce your final expenses, you could opt for an interest-only lifetime mortgage or voluntary repayment plan. This enables you to cover the interest and part of the loan each month. In this example, the applicant would lose almost half the property’s value at the end of the plan to pay for the lifetime mortgage.

How can you find the best interest rates?

Firstly, you should always check if the lender you plan to use is a member of the Equity Release Council in the UK. They uphold the standards in the industry and implement safeguards. To ensure that an equity release plan is economically viable and worth your while, it’s essential to find a reasonable interest rate.

You should then always seek professional advice before making a decision. An advisor can give you a roadmap of what to expect, how much the plan will cost you, and which scheme is best for your circumstances.

To find reasonable interest rates, you should get multiple quotes from various providers using comparison engines and a reputable broker.

What should you consider?

As you can see, there are plenty of benefits to equity release plans. You should, however, be aware of some factors before deciding on whether it’s the right product for you.

  • You’ll have to pay an early repayment charge if you want to exit the plan early. This can often be substantial and mean that you are locked into the plan even if you want out.
  • Your mortgage will cost more in the end due to interest roll-up. This can be avoided through specific lifetime mortgage plans.
  • As an inheritance, the amount you leave will be significantly lower, especially if you borrow the maximum amount against your property.

As with any financial decision, you should ensure that you contact a professional advisor to guide you through your options. You might find that there are other loan products on the market that are more optimal for you.