If equity release is something you’re considering, you’ll want to know what costs you’ll incur if you decide to go ahead with it. As with all mortgage types, there are various costs that you’ll incur if you release equity. On this page, we will run you through the expenses you can expect to pay.
What are the initial charges with equity release?
The initial charges will depend on the lender you go with, but the most common charges include:
- Paying for independent financial advice
- Application costs (including legal fees)
It’s important to get independent financial advice from a professional, reputable financial adviser. This person can carry out research into the equity release market to ascertain whether releasing equity is the right option for you and identify the best deal from the most suitable lender. Think Plutus can do this for you with access to the full market of equity release plans and real expertise in a complicated market.
Application costs are similar to what you get when taking out any kind of mortgage. The fees cover the set up of the equity release plan and the legal costs involved. These charges will vary depending on the lender, and there may be other initial charges with some providers. Think Plutus can help keep the costs down by choosing the lenders with the least charges and lowest interest rates.
What are the interest rates on equity release?
In addition to those initial charges, you will need to think about equity release interest rates.
As at August 2022, the lowest equity release interest rate for customers aged 65 is 4.35%, while the highest is 7.55%
The full amount that your interest adds up to with your lifetime mortgage depends entirely on how long it runs for. Essentially, this means it depends on how long you live after releasing equity, or how long you are able to stay in your own home before moving into permanent residential care. The other key factors are the type of plan you choose and, of course, the interest rate.
For example, if you take out a roll-up lifetime mortgage, you get your tax-free cash paid out in a single lump sum. The interest on this loan is ‘rolled up’ and it ‘compounds’ each month or year, depending on the terms of your plan. This means that the debt grows each year.
‘Rolled up/compound’ interest explained
If you’re wondering what it means to have rolled-up/compound interest on a loan, here’s a simple explanation:
- When you reach the end of your first month/year (depending on the deal you have), the interest is added to the original loan.
- At the end of the following month/year, the interest is compounded – this means it is added to the original loan PLUS the interest charged during that first month/year.
- This process continues in the same way throughout the full term of the loan, so the interest accumulates.
- This means that even though the interest rate may be fixed, the amount of that interest grows alongside the size of the debt.
How do lifetime mortgage rates compare?
The interest rate you are able to secure when releasing equity will depend on your circumstances, your requirements and the deal you choose. The tables below give you an indication of how different interest rates will affect the amount you owe over 5, 10, 15 and 20 years with compound interest rates of 4% and 5%.
Annually rolled-up lifetime mortgage of £70,000 with a 4% compound interest rate
| Year | 4% Interest | Total Interest | Mortgage Balance |
|---|---|---|---|
| 0 | - | - | £70,000 |
| 1 | £2,800 | £2,800 | £72,800 |
| 2 | £2,912 | £5,712 | £75,712 |
| 3 | £3,028 | £8,740 | £78,740 |
| 4 | £3,150 | £11,890 | £81,890 |
| 5 | £3,276 | £15,166 | £85,166 |
| 10 | £3,985 | £33,617 | £103,617 |
| 15 | £4,849 | £56,066 | £126,066 |
| 20 | £5,899 | £83,379 | £153,379 |
Annually rolled-up lifetime mortgage of £70,000 with a 5% compound interest rate
| Year | 5% Interest | Total Interest | Mortgage Balance |
|---|---|---|---|
| 0 | - | - | £70,000 |
| 1 | £3,500 | £3,500 | £73,500 |
| 2 | £3,675 | £7,175 | £77,175 |
| 3 | £3,859 | £11,034 | £81,034 |
| 4 | £4,052 | £15,085 | £85,085 |
| 5 | £4,254 | £19,340 | £89,340 |
| 10 | £5,430 | £44,023 | £114,023 |
| 15 | £6,930 | £75,525 | £145,525 |
| 20 | £8,844 | £115,731 | £185,731 |
Please note that the figures in the above tables are only examples. The amount you pay will depend on your circumstances, the product you choose and the lifespan of your loan. Think Plutus can help you crunch the numbers to get an idea of what your loan will cost you.
Is it possible to pay the interest on equity release?
There are lifetime mortgage products that give you the option to pay off some or all of the interest in regular payments. If you decide to do it this way, the mortgage will cost you less in the long-term. Different lenders offer different deals for doing this so if it’s something you would like to do then talk to your adviser about it. When you take out a interest only lifetime mortgage where monthly repayments are involved, the amount you can repay may be assessed on the basis of your income.
What other costs are there in equity release?
Solicitors fee
If you decide to proceed with an equity release scheme, you will have to hire a solicitor to process all of the legal work for you. Your solicitor will consult with you to ensure everything is in order right up until the point where the money is released.
Surveyor’s valuation
If you bought your home with a mortgage, you may remember that you needed to have a formal house survey conducted to establish the property’s value before the mortgage could be confirmed. The same rule applies with releasing equity.
A surveyor will evaluate the property and report their findings to the lender you are working with. Your lender will usually secure a valuation for you, but you should always check that the surveyor is RICS registered.
When do you have to pay the fees?
Financial adviser
Adviser fees vary – some are payable upfront, some are paid out of the loan and some are added to the loan
Lender admin/application fees
If these fees apply, they are usually paid when the plan begins and your money is released
Interest
With lifetime mortgages, the interest is usually paid off when you die, sell your home or move into permanent residential care
Surveyor
If it applies, this fee is usually paid when the application is submitted
Solicitors fee
Typically paid once the application is completed and funds are released
What is the total cost of the charges?
Typically, the sum of all the charges involved amounts to between £3,000 and £4,000. As there is a lot of variation in the fees from one lender to the next, it’s difficult to give a specific amount without knowing your individual circumstances.
For example, the application fees vary greatly between lenders. Some don’t charge these fees at all, while others structure their plans so that you get cashback to cover the costs for you.
There is so much variation between lenders and deals, which is why it’s so important to get the correct advice from an adviser with whole-of-market access.
Next steps
If you are seriously considering releasing equity from your home, you should carefully consider the pros and cons of equity release. You should also seek expert advice to ensure you know everything that will be involved. You should never make any big financial decision lightly, and releasing equity is a huge decision.
Please note that if you have any outstanding mortgage balance on your property, this will have to be paid off using the equity you release. Whatever cash remains can be spent as you please, for example to boost your retirement income or offer financial support to a loved one.
Speak to the experts at Think Plutus and we’ll walk you through everything you need to know. This includes the costs that you will need to consider with equity release. This will enable you to establish whether it is the right option for you.
