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As of September 2024, the best equity release interest rate is 5.18% (MER).
However, equity release interest rates can be a complicated issue. Just because that’s the lowest rate of interest, this does not necessarily mean you will be entitled to it.
And just because a product has a lower rate of interest, it does not always mean it will be the best nor the cheapest product for your specific circumstances.
The interest rate you can get is determined by a variety of factors, which we discuss in full below.
Rather than looking at the “best” equity release interest rates, it may be better to look at the “average”:
In the Autumn 2023 Market Report, the Equity Release Council reported the average interest rates for lump sum equity release was 6.66% MER and 6.28% MER for drawdown lifetime mortgages.
Now let’s look at some of the rates on offer as of September 2024:
Learn what is meant by enhanced, drawdown and lump sum equity release on their respective pages.
MER stands for Monthly Equivalent Rate. MER is the interest rate charged on an equity release loan divided by 12 months i.e. It is a method of calculating the monthly interest rate.
MER is useful when interest is compounded each month (so you pay interest on interest you accrued in the previous months), which is the case with equity release.
AER (Annual Equivalent Rate) is the annual interest rate, while MER divides that interest over 12 months.
Pro Tip: It’s vitally important to make sure that you compare the same type of interest rate on competing products, as sometimes you will be quoted the MER rate and then the AER rate for different competing products.
As a rule of thumb, and in current market conditions, 5% MER is seen as brilliant, 6% MER as average, and 7%+ MER for higher levels of borrowing with more complex features.
Below, we list 5 most important factors that influence the level of interest rate you can get for equity release:
The percentage of your property’s value that you wish to borrow significantly impacts your interest rate.
Generally, the closer you are to borrowing the maximum available amount, the higher the interest rate is likely to be.
Therefore, keeping the loan amount as a smaller percentage of your property’s value could potentially result in a lower interest rate.
You can learn more about loan-to-value here.
While age doesn’t directly determine your interest rate, it does influence the maximum amount you can borrow, which can indirectly impact the interest rate.
Typically, borrowing closer to the maximum available amount results in higher interest rates.
For instance, if a 55-year-old wants to release 20% of their property’s value, the best interest rate might be around 6.36% (AER). By contrast, a 75-year-old looking to release the same percentage might receive a lower rate of 5.67% (AER).
Marital status can also affect your access to certain equity release plans.
If you are married but intend to take out equity release in only one name, some lenders may not offer their products to you.
Applying jointly may give you access to a wider range of plans.
Additionally, lenders calculate the loan amount and interest rate based on the youngest applicant’s age. In some cases, applying in one name might result in a lower interest rate or a higher loan amount.
Different lenders offer a variety of product features, which can impact both the interest rate and the overall cost of your equity release.
Products with additional features such as inheritance protection or reserve facilities often come with higher interest rates.
The lender’s criteria can also limit your options, as certain lenders with the best interest rates might not approve your property.
Additionally, some plans come with extra fees, such as completion fees, that can raise the overall cost. Even plans with lower interest rates might include other fees that could make them more expensive in the long run.
Your credit history plays a crucial role in determining the available plans and the interest rates you may be offered.
Even if you have experienced financial challenges such as County Court Judgments (CCJs) or insolvency, you can still qualify for equity release.
However, plans offering the best interest rates might not be accessible to you under these circumstances.
Additionally, if you currently face outstanding credit issues, some lenders provide the flexibility to use equity release to settle those debts.
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When considering equity release, specifically lifetime mortgages, one of the key decisions you’ll need to make is whether to choose a fixed or variable interest rate.
This choice can significantly impact the overall cost of your plan, so it’s essential to understand the differences and benefits of each.
The vast majority of lifetime mortgage products come with fixed interest rates, which are set at the outset and remain unchanged throughout the life of the plan.
This means you have complete certainty about how much interest will accrue over time, regardless of fluctuations in the market or any increases in interest rates.
A fixed-rate ensures that, no matter how long the mortgage lasts, you won’t be caught off guard by rising interest rates, providing stability and peace of mind.
This option is particularly appealing for those who prefer predictability in their financial planning.
Moreover, with a fixed rate, you can calculate exactly how much the loan will grow over time, making it easier to understand the total cost of borrowing.
Given that equity release is often a long-term commitment, having this clarity can be highly beneficial for those looking to manage their estate or inheritance planning.
Variable interest rates for lifetime mortgages are less common but do exist.
Variable rates function similarly to those on traditional residential mortgages, where the interest can fluctuate over time.
In most cases, variable rates on lifetime mortgages are tied to an external measure, such as the Consumer Price Index (CPI). This means that the interest you pay could rise or fall in line with inflation.
One Family, a lender that once offered variable rate equity release plans, explained that their rates were linked to the CPI, with annual adjustments made every December based on the CPI reported by the Office of National Statistics (ONS).
For instance, One Family offered a two-year fixed rate initially, after which the rate become variable, tracking the CPI. One Family is currently only offering fixed rates.
While variable rates could potentially offer lower interest rates in times of low inflation, there is always a risk that rates could increase if inflation rises.
To ensure some degree of protection for consumers, the Equity Release Council requires that all variable rate products come with an upper cap.
This means that even if inflation rises significantly, there is a limit to how high the interest rate can go.
While this cap offers reassurance, it’s important to note that variable rates are generally more unpredictable than fixed rates.
Therefore, even with a cap in place, the final cost of your lifetime mortgage could be higher than initially anticipated if rates increase within the cap’s limits.
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In recent years, fixed interest rates have often been lower than variable rate options, making them a more attractive choice for many borrowers.
As a result, financial advisors have frequently recommended fixed-rate plans due to their affordability and the certainty they offer.
The stability provided by fixed rates is especially valuable in times of economic uncertainty or when inflation is volatile, as it eliminates the risk of future rate increases that could lead to higher borrowing costs.
Additionally, fixed rates make long-term financial planning much simpler.
Whether you’re concerned about the impact on your estate or managing the future of your property, knowing exactly how much interest will accumulate over time is a significant advantage.
This can be particularly important for those looking to leave a specific inheritance to beneficiaries, as it reduces the uncertainty around how much equity will remain in the property.
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Choosing between fixed and variable interest rates ultimately depends on your financial goals and tolerance for risk.
If you value predictability and want to lock in today’s rates without worrying about future increases, a fixed interest rate might be the best option.
However, if you’re willing to take on a bit of uncertainty in exchange for potentially lower rates in the future, a variable rate could be worth considering.
Always take the time to review the details of any plan carefully, especially with variable rates.
Understanding how the rate will be adjusted, what caps are in place, and how those changes could impact your financial situation is crucial before making a decision.
Consulting with a financial advisor who specialises in equity release can help you determine which option best suits your needs.
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Securing the best equity release rates involves detailed planning, smart decision-making, and professional guidance. Here are specific strategies to help you get the lowest rates:
A specialist equity release advisor can typically access lower rates compared to you searching the market yourself. Advisors have access to exclusive deals, often not available to the public, and can help match you with a lender that offers lower interest rates based on your situation.
Also, interest rates are only one part of getting the cheapest and best deal. An advisor can help you get a deal that might be cheaper and more suitable for your needs despite it not, techically, having the lowest rate of interest.
Also, it’s almost a given that advisors understand lender criteria better than you do, such as the loan-to-value (LTV) ratio, which affects rates.
They can recommend plans with more favourable terms based on your property and loan needs.
You can do things like quote offers given by their competitors. When you receive quotes from different lenders, use the best one to negotiate with other lenders. Highlight your strong credit history or low LTV to secure better terms.
Also, look at the bigger picture when it comes to the overall costs of each product. Lower interest rates don’t always mean lower overall costs. Some plans with seemingly low rates may have higher overall fees, like setup or exit fees, so make sure to calculate the total cost of borrowing.
It’s important to Monitor Market Conditions. Interest rates fluctuate with the economy. For instance, the Bank of England will increase interest rates to tackle inflation.
Work with your equity release adviser to monitor the market and apply when rates are most favourable to you.
Times of low inflation or when lenders are offering promotional rates may equate to more favourable terms.
As stated above, the amount you borrow as a percentage of your property’s value (LTV) directly affects your interest rate.
As a general rule, the lower the LTV, the more likely you are to qualify for the best rates.
Consider borrowing less than the maximum to access lower rates, which can reduce overall costs. This might mean borrowing money from family or dipping into your savings.
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Understanding equity release rates is essential, but several common misconceptions can lead to confusion.
Here are some specific myths and the facts behind them:
This is a frequent misunderstanding. Unlike traditional mortgages, equity release rates can differ significantly between providers.
For example, larger lenders may offer lower rates due to economies of scale, while smaller lenders may charge more.
Rates are influenced by factors such as your age, loan-to-value (LTV) ratio, and the lender’s risk appetite.
For instance, a borrower seeking to release 30% of their property’s value at age 60 might be offered a different rate compared to someone aged 75 seeking the same amount.
Pro Tip: Working with an equity release advisor can help you compare a wide range of lenders and access exclusive rates.
While a lower interest rate seems attractive, it doesn’t always mean the plan is the most cost-effective.
Many low-rate plans come with hidden costs, such as higher setup or completion fees.
Additionally, some plans may lack flexible features, like downsizing protection or the ability to make early repayments without penalties.
For instance, if you plan to downsize in the future, a slightly higher interest rate with better flexibility might save you more in the long term than a lower-rate, rigid plan.
Tip: Always calculate the total cost of the plan, including all fees, over the loan’s expected duration.
It’s a common belief that variable rates in equity release are volatile, similar to residential mortgages.
However, equity release products are generally more regulated, and variable rates are typically linked to the Consumer Price Index (CPI).
To protect consumers, most variable-rate products come with a cap, meaning the interest rate cannot exceed a certain limit, regardless of inflation.
For example, a plan with a variable rate tied to CPI may have a cap at 7%, providing security even in times of high inflation.
Pro Tip: Ensure you understand the upper limit on any variable rate before proceeding.
While fixed rates provide certainty about how much interest will accrue, some borrowers assume this also means no additional fees or changes over time.
However, fixed-rate products can still include other costs, such as an early repayment charge, if you wish to pay off the loan early.
Pro Tip: Ensure you review all terms carefully to avoid surprises, even with a fixed-rate product.
While equity release interest rates have historically been higher than residential mortgages, rates have become much more competitive in recent years due to increased market competition.
Many lenders now offer rates comparable to standard mortgage products, particularly for borrowers with lower LTV ratios.
For example, in 2023, some equity release products offered rates as low as 5% APR, compared to the 6-7% common just a few years ago.
Pro Tip: Keep an eye on market trends and ask your broker to alert you when lower-rate products become available.
Below, we produce answers to common questions around equity release interesting rates, and specifically how to get the best equity release interest rates:
Equity release rates don’t change as frequently as standard mortgage rates, but they do fluctuate in response to broader economic conditions.
Rates are typically reviewed by lenders periodically, influenced by factors like inflation, interest rates set by central banks, and the financial markets.
Example: During 2022’s inflation spike, equity release rates increased from historic lows of around 3% to nearly 6% by the end of the year. It’s crucial to monitor the market and lock in a rate when it’s favorable.
Yes, switching to a lower rate is possible but may come with costs.
Early repayment charges (ERCs) are common and can be high, sometimes up to 25% of the loan value depending on the plan.
Some providers offer “downsizing protection” or “no-penalty switching” options after a certain period.
Example: A borrower with a 6% interest rate could save thousands by switching to a 5% rate, but they must factor in potential ERCs, which could offset the savings. Always consult your provider and financial advisor to understand the costs involved.
Equity release rates tend to be higher than traditional mortgage rates due to the unique structure of lifetime mortgages, where repayment happens only when the borrower dies or moves into long-term care.
Example: While standard residential mortgage rates range from 2% to 5%, equity release rates typically sit between 5% and 7%. This premium is due to the open-ended nature of equity release loans, making them a higher risk for lenders.With the recent increased competition in the market, some equity release rates have fallen closer to 5%, making them more affordable than in previous years.
Yes, aside from the interest rate, there can be additional fees that significantly impact the overall cost of the loan.
Common fees include arrangement fees (which can range from £500 to £1,500), legal fees, valuation fees, and early repayment charges.
Example: A plan might offer an attractive rate of 5.5%, but if it includes £2,000 in upfront costs and hefty early repayment charge, the overall cost of borrowing can be much higher. Always ask for a full breakdown of all fees, including exit charges, before committing to a plan. This ensures you have a clear understanding of the total cost of your equity release.
In conclusion, securing the best equity release interest rate depends on several factors, including:
While the lowest available rate may be beneficial to some, this doesn’t guarantee it will be the best option for everyone, which may include you.
Factors such as the type of plan—whether lump sum, drawdown, or enhanced lifetime mortgage—can significantly influence the overall cost.
Additionally, the rate’s structure, whether fixed or variable, and the inclusion of features like inheritance protection or early repayment flexibility, all affect the final cost.
Therefore, it’s essential to compare products carefully and consider not just the interest rate but the total cost of borrowing, including any fees.
Consulting a financial advisor is advisable to navigate these complexities and secure the best possible rate for your individual circumstances. You can find out more by contacting the Equity Release Warehouse today on 0330 058 1579.
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