Is Equity Release Interest Fixed?

When you take out equity from a house or apartment, you will have to pay back interest on top of the loan amount. Equity release consumers do not tend to pay back interest themselves, as it is usually paid when they pass away or enter long-term care, and their home is sold.

The interest with equity release is known as compound interest, which means it accumulates every year.

In the first year, you will be charged a fixed or variable interest rate as a percentage of the loan amount. In the second year, you will be charged this interest rate on the loan amount, but also on last year’s total interest.

This means that the interest rises very quickly with equity release, whether it is fixed or variable. However, as it does not have to be repaid until the end of the scheme, this does not have a significant effect on the lives of equity release customers.

The only time that it would have a significant effect is if the client did not get a no negative equity guarantee.

This can result in a client owing such a large amount of interest that their home sale does not cover the cost of their loan. It can happen with both a fixed interest rate and a variable interest rate.

Fortunately, this can be avoided by selecting an equity release plan with a no negative equity guarantee, which is very easy to find.

All lenders that are regulated by the Equity Release Council (ERC) have to include a no negative equity guarantee in their equity release products (1). Your safest bet is always to find a lender that is a member of the ERC.

Is Equity Release Interest Fixed?

It is more common for equity release interest to be fixed, rather than variable. This means that you will be charged the same amount of annual interest for the entire equity release scheme.

However, some equity release providers offer variable interest rates. When they do this, they must put a cap on the interest, to ensure the customer knows what the interest rate could rise to, and they are therefore prepared in terms of how much they are going to owe the provider.

The rule that there must be a cap on variable equity release was created by the Equity Release Council (2).

All ERC-regulated companies must follow this rule, so you will never find yourself owing an unexpected amount of interest unless you go for an unregulated company (which would not be sensible).

The Pros and Cons Of Fixed Equity Release Interest

Below, we outline the pros and cons of fixed-interest equity release:

1. Pros

When equity release interest is fixed, it can put you at ease about what your future financial situation will look like. As you know how much interest will be owed each year, you can estimate how much you would owe by the end of the scheme. This can be helpful when it comes to planning future care, and inheritance.

Fixed interest rates are more common in the equity release world, so you would have more options for equity release plans if you opted for this type of interest. This could give you the opportunity to access great benefits, such as higher loan amounts.

If you have fixed interest with equity release, you will owe the same amount regardless of how the housing market changes over the course of the equity release scheme. This is particularly beneficial for younger customers, who could have an equity release loan for over thirty years.

2. Cons

One disadvantage of fixed equity release interest rates is that you will not benefit when interest rates decline. As you cannot predict how interest rates will change over time, this could result in you owing more interest than a customer who opted for variable rates of interest.

Ultimately, this could leave your family with less money when you pass away, as more money would be taken from your home sale to repay the loan.

Another drawback is the fact that fixed interest rates sometimes come with repayment fees. If you ever want to repay the interest on your equity release loan, you could end up having to pay this fee, which would be avoidable with variable interest.

Finally, it is common for fixed interest rates to be higher than variable interest rates. This means that you have to prepare to owe more interest, unless you are fortunate enough that variable interest rates rise for a long time while you are on the equity release plan.

The Pros and Cons Of Variable Equity Release Interest

Below, we outline the pros and cons of variable-interest equity release:

1. Pros

One advantage of variable interest with equity release is that it is much more flexible. You do not commit to paying a fixed percentage, so you get to reap the benefits when we are blessed with low-interest rates.

Variable interest rate deals tend to be more affordable than fixed interest, so if you would rather save money in the short term, they can be useful for this reason.

Finally, it is often easier to make changes to your equity release plan when you are working with variable interest. This comes in handy if you decide you want to switch plans, switch lenders, or come out of the scheme completely.

2. Cons

Firstly, variable equity release interest is completely unpredictable. Even if you get a cheaper deal, you cannot be sure that you will be paying less money overall. This means you are taking a risk when you opt for variable interest.

Secondly, it is harder to plan ahead for the future with a variable interest rate. If you want to leave an inheritance to your family, it is better to know how much money they would be left with. However, if you do not know how much interest could accumulate, this is very difficult to prepare for.

FAQs About Equity Release Interest

Below, we try to answer common questions about interest payments and equity release:

1. What are the lowest-interest equity release plans?

One of the lowest-interest equity release plans is the lump sum lifetime mortgage. With this plan, you usually get a fixed rate for life. If interest rates do not drop significantly, you could end up paying much less interest with a lump sum scheme.

The enhanced plan is another great option if you are looking for a low fixed interest rate. It is designed to help people who are in the later stages of retirement, or people who struggle with their health.

Finally, we would recommend a home reversion plan to clients who want to avoid high-interest rates. When you receive a home reversion loan, you get all of the money at once, and you do not have to pay compound interest. This keeps the cost of equity release low.

To avoid compound interest completely, you could get an interest only lifetime mortgage, and keep on top of monthly payments of interest. The interest rate would not necessarily be fixed or low, but if you can afford to repay it, you would not be left with a big sum at the end of the scheme.

2. What are the highest-interest equity release plans?

Drawdown lifetime mortgages sometimes have the highest fixed interest rates. If you are planning on taking out a large equity release loan, you may want to avoid a drawdown plan.

However, if you take out money as and when you need it, you will only owe interest on the amount you have withdrawn, so you could keep interest low by doing this.

Other plans with potentially high equity release interest rates are the second home lifetime mortgage and the buy-to-let lifetime mortgage.

You tend to take out large loans with these plans, as you need to be able to afford a new home. This means there is more risk for equity release companies, so they often charge more interest.

Finally, enhanced lifetime mortgage interest rates can be very high. Though this can be one of the most affordable schemes for certain customers, if you do not qualify for a lower fixed interest rate on this plan, you will be paying the standard rate, which is higher than average. To avoid this, make sure you qualify for the benefits on an enhanced plan before signing off on it.

3. Is equity release interest fixed at the same amount for each equity release plan?

No, the fixed interest rate is not the same for each equity release product. One lender could charge a 6% interest rate for a lump sum lifetime mortgage, and another could charge 8%. You need to research different interest rates before deciding which plan is right for you.

The interest rate will also be dependent on your personal circumstances, so you need to meet with a financial adviser to find out how much interest you could be paying according to your age, your credit history, your marital status, etc.

4. What happens if I die before my equity release interest is repaid?

If you die before your equity release interest is repaid, you are not in a rare position. This is how the scheme is supposed to work. Until you pass away or go into permanent long-term care, you will not have to repay any of the interest.

To make up for the amount of money you have borrowed, the equity release provider sells your property and takes the funds they are owed.

If your interest has reached an amount that is higher than the house sale profit, you will be protected if you have a no negative equity guarantee (which most people do nowadays). If not, your family may be asked to pay the difference.

5. Can I calculate how much equity release interest I will be charged?

Yes, you can estimate how much equity release interest you will owe by using an equity release interest calculator. However, you need to meet with an equity release adviser and select a lender and plan in order to get an accurate figure.

In the meantime, you can find out the minimum, maximum, and average fixed interest rate, to get an idea of how much equity release interest could accumulate.

6. Why is equity release interest fixed at a high amount?

Equity release fixed interest rates are higher than most fixed interest rates for conventional mortgages. Some people decide to avoid equity release for this reason; they don’t want to owe a large amount of interest if it is not necessary.

The reason interest rates tend to be higher with equity release is that it is much riskier for a lender to offer an equity release loan than a regular mortgage loan.

They cannot rely on the fact that the customer has a great credit rating, or a high income, as the affordability criteria has little to no bearing on whether a client is eligible for equity release.

The only factor they can depend on is their client having a valuable property that can be sold when the client passes away. To make up for the risk that comes with loaning money to someone with a potentially low income and poor credit rating, equity release companies charge a higher amount of interest.

As the client does not have to pay back any of the loan before they die, this also means the lender gets enough money from the client eventually, as the compound interest ensures they end up paying back the amount they borrowed.

7. What is equity release interest fixed at, on average?

As we have pointed out, your interest rate cannot be determined until you have a meeting with an equity release specialist. There are too many factors that can change the amount of interest a lender decides to charge. However, we will discuss the average equity release interest rates to give you an idea of what to expect.

At the moment, the lowest fixed rate you could get is around 6%. The more expensive rates tend to be around 8-9%.

If you are a younger homeowner, you are likely to be more affected by high interest rates, as the interest will accumulate for many years. Keep this in mind when you are looking for an affordable equity release plan.

It is also wise to consider how the cost of your loan will impact on compound interest. Smaller loans accrue less interest, so this is worth looking into if you do not need to release the highest possible loan.

Yet, there are always ways to manage compound interest if you want to access the highest loan. You could take out a voluntary repayment plan or an interest-only plan, and get a no-negative equity guarantee. This would keep the interest as low as possible, meaning your family would get more of your inheritance when you die.

Find Out More About Equity Release Interest

To get an in-depth answer to ‘is equity release interest fixed?’, get in touch with us on 0330 058 1579 to speak to a professional adviser.

We can explain the key differences between the two types of interest, estimate how much interest you could be paying, and recommend a plan with the right amount of interest for you.

It is only possible to know whether equity release would benefit you if you speak to a specialist and tell them all about your situation.

When our team are aware of your financial and individual circumstances, they can analyse how releasing equity and not releasing equity would impact you both temporarily and permanently.

If you want to speak to your family before making a final decision, we completely understand this. They will be impacted by your decision, so it is wise to ask them their opinion, and explain how equity release would affect their inheritance.

However, many of our clients feel more comfortable speaking to their family after having a call with us. This is because we equip them with useful knowledge about the scheme, which means they have an easier time explaining it to their family when they sit down to have this conversation.

If you are deciding between equity release and another retirement scheme, we can help you to analyse the benefits and drawbacks of each one.

Have a look at our page on the alternatives to equity release before giving us a call, as it will give you some great background information on the different methods of increasing your retirement income.

References

[1] What is a no-negative equity guarantee? https://www.equityreleasecouncil.com/what-is-equity-release/faq/what-is-a-no-negative-equity-guarantee/

[2] What are the product standards set by the Equity Release Council? https://www.equityreleasecouncil.com/what-is-equity-release/faq/what-are-the-product-standards-set-by-the-equity-release-council/