What Does Equity Release Cost?

What does equity release cost? To find out the answer to this question, we need to first explain what equity release is and how it works.

Equity release is a scheme targeted at people aged 55 and over who own their own home and would like to benefit from the value of this home while they are still living.

It is particularly helpful for people who are finding it hard to make ends meet, but it can also be beneficial for people who simply want to get more out of life, or who need help securing a second home or a holiday home.

The way it works is that you receive a loan from an equity release provider either as a lump sum or as monthly payments, and you are free to use this money however you would like as it is tax-free. Interest rates do apply, but the exact percentage will vary depending on the plan that you select.

You have the option to pay back some of this loan as you go, but this is not a requirement as the lender will profit from the scheme by receiving the proceeds from your property sale when you pass away or move into long-term care.

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The Varying Costs of Different Methods of Releasing Equity

Some types of equity release involve higher costs than others – this is largely to do with availability and risk. However, it also depends on individual factors including your age and your property’s total value.

Home reversion plans tend to be the more costly option, which is perhaps one of the reasons that they are quite rare. They require you to sell your home, or a percentage of it starting from 25%, to a provider. However, the money offered to you is always less than the asking price of your property (1).

Another reason home reversion is costly is that if the value of your property decreases, there may not be enough money in the end – when your property is sold – to cover the debt that you are in.

On the other hand, with a lifetime mortgage, you are protected against this thanks to the No Negative Equity Guarantee. This is reassuring for people who are keen on leaving an inheritance, as you know that there will always be money to cover your debt.

Having said that, lifetime mortgages are not extremely cost-friendly either, as the debt tends to rise quickly due to the fact that the interest accumulates over time, and this interest is charged when the loan is paid, as it is added to the overall loan amount that you owe.

There are certain aspects of different equity release schemes that can make things more affordable for you.

For example, you could select a plan that offers a low-interest rate, such as a lump sum plan, which is a very popular scheme and tends to be the plan with the lowest equity release interest rate overall.

Alternatively, you could opt for an interest-only plan, which allows you to pay the interest bit-by-bit instead of it being added to the loan. If you manage to pay off the full interest each month, your debt will never be more than the amount that you borrowed at the start.

Voluntary repayment plans also boast low-interest rates, as you can choose to pay back however much you want when you are in the position to do so.

For example, if you are still receiving an income from work and you have recently done a lot of overtime, you could use this extra money to pay off more money that month.

Another suggestion is to go for a plan with a rate of interest that is fixed for life, such as a buy-to-let scheme, which is designed for people who need financial aid to purchase a second property, either to live in, rent out, or to keep as a holiday home.

It is also wise to be aware that other plans charge particularly high-interest rates, such as drawdown plans and enhanced plans. However, we encourage you to contact us to talk through your options such as the best rates, as these higher interest rates do not necessarily mean these plans will be the most expensive overall.

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What Does Equity Release Cost at the Beginning: Set-up Costs

You will need to consider the initial costs that are required to set up the process of releasing equity, including an application fee, an advice fee, a surveyor fee, administration fees, and legal fees.

Perhaps the first service you will pay for is independent legal advice from a financial adviser, and these consultation fees tend to be calculated as a percentage of the loan that you are intending to borrow. Often, this is around 1-2%.

However, this will depend on the firm you go with. Always ensure the firm is registered with the FCA and is a member of the ERC to ensure the equity release process is handled fairly from beginning to end, and so that you will have some support if you need to make a complaint.

Another cost is the arrangement fees, which are charged as a result of the costs involved with credit, and are usually between £500-£3,000.

Valuation fees will also be necessary as your property must be inspected before a lender agrees to offer you a loan, and the price of this will vary depending on the property that you own.

Finally, there are legal costs that must be paid when you take out an equity loan. You will also have to pay money to your solicitor, and each solicitor will ask for a different price for this, so the fees vary.

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What Does Equity Release Cost: Additional Costs

After the solicitor’s fees, lender’s fees, and other various charges, there are additional costs to consider. This will not be applicable to everyone, but it is worth reading in case you could be affected by any of these two situations.

If you decide to end your scheme early, it is very likely that you will have to pay for this as the provider is relying on you to stick with the scheme for the rest of your life. You could expect to pay between 3-25% of the amount you have lent from the equity release provider.

Another key thing to consider is whether the equity you release may affect your entitlement to means-tested benefits. This is not the case for everyone, but it is certainly something to consider as the loss of your benefits may make the financial advantage of equity release redundant.

Please call our 24-Hour Helpline: 0330 058 1579

What Interest Rate Do You Pay on Equity Release & Can You Repay the Interest Early?

As we mentioned above, the equity release interest rates are different for each type of plan. In terms of repaying interest early, this is possible with some schemes, but you would have to ask a financial adviser this before deciding on a plan.

Do I Need to Pay Tax on Equity Release?

No, the costs of equity release never involve tax, as part of the deal is that you will always receive tax-free cash either in regular instalments or all in one go. This is part of the appeal of taking out equity, as it gives you flexibility to make your own decisions about what to spend your money on.

When Do I Pay Equity Release Fees?

Generally, the idea is that fees are not charged until you pass away and your property is sold, which is when the money will go to the provider. However, as we have described, it is sometimes possible to make monthly payments to pay back some of the loans if you would like to do this.

Please call our 24-Hour Helpline: 0330 058 1579

What Can You Spend the Equity Release Loan On?

When it comes to taking out equity release, it is entirely up to you what you decide to spend your money on. Some ideas are: paying your bills, making improvements to your home to make it more accessible, going on family holidays, buying a second home, or having home renovations.

Though we cannot tell you what to spend your loan on, we are available for financial advice so we can guide you on the most sensible things you could do with the money you receive through your loan.

To get our expert advice, call us on 0330 058 1579 and speak to a financial advisor who will help you understand the process of equity release from beginning to end. They will explain all the concepts that could affect the costs of equity release, such as compound interest, early repayment, and whether you currently take out a regular mortgage.

They will not push you to make any sudden decisions, but they will help you make an informed choice on whether to release equity as a homeowner of over 55 years of age in the UK (2).

Before you contact us, feel free to use our equity release calculator to figure out how much a lender may charge for the loan secured against your home.

This price will be an estimate, so you will need to speak to an equity release adviser or speak to a financial adviser to confirm this, but it does give you a general idea that is useful to know as you are considering equity release and pondering the amount of money you would like to release.

References

[1] Equity release https://www.ageuk.org.uk/globalassets/age-uk/documents/factsheets/fs65_equity_release_fcs.pdf

[2] Equity release: a way of releasing money from your home https://www.rbkc.gov.uk/media/document/equity-release