Are you considering equity release, but you’re concerned about hidden costs involved?
Without this vital information, you could end up paying vastly more for your equity release loan than you expected!
Over £4bn in property wealth through equity release products in 2021. Could you be next?
This article will help you discover:
- What it costs to release tax-free cash in Jan 2022.
- If monthly payments are required for equity release.
- If equity release is an affordable consideration during retirement planning.
To protect your interests, our team at EveryInvestor has reviewed over 220 equity release plans to do a detailed analysis of the costs involved in Jan 2022.
Here’s what we found!
What is Equity Release?
An equity release scheme is a type of loan secured against the property value of your primary residence. Designed for older borrows, you’ll receive tax-free cash, with your house as collateral against the loan. The loan amount and compound interest are typically paid, from the sale proceeds of the home in question, when the last homeowner dies or enters long-term care. Releasing equity is a ‘rest of life’ commitment and it will likely impact your means-tested benefits.1
Full article: What is Equity Release?
There are 2 main types of equity release to discover below.
With a lifetime mortgage, you can live in your home for the rest of your life and retain 100% ownership. You will pay interest on the loan amount, but no monthly repayments are required in your lifetime. Instead, the interest is compounded and covered when you die or enter long-term care.
Learn more: What’s a Lifetime Mortgage?
With a home reversion, you sell all or part of your property for under-market value to a lender, in exchange for one lump sum, a lump sum, and a drawdown facility, or a monthly salary. In return, you can live in your home, rent-free for the rest of your life. The lender will take their share of the property when it’s sold upon the last homeowner’s death or a move to a care facility.
Discover: What’s a Home Reversion Scheme?
How Much Does Equity Release Cost?
The overall cost of an equity release plan is between £1,500 and £3,000. In addition, you’ll pay a fixed or capped interest rate with all lifetime mortgage options.
Is Equity Release Worth the Cost?
Equity release is worth the cost if a financial adviser has confirmed that it’s the best option for your financial situation. Interest rates are usually slightly higher than that of a regular mortgage and the loan value (LTV) that you’ll receive is only a portion of your property value (usually up to 60%). Downsizing is usually a more cost-effective alternative, but it also comes with pitfalls.
Some inspiration: The Most Popular Equity Release Alternatives in Jan 2022.
How Do I Know if I Can Trust an Equity Release Lender With my money?
You can only trust an equity release lender with your money if they are a member of the Equity Release Council. The Council is designed to safeguard the industry and has implemented essential industry standards, like the ‘no negative equity guarantee’.
The same way the ERC focuses specifically on equity release, the entire financial industry in the UK is regulated by the Financial Conduct Authority (FCA),2 including equity release. Always select a lender that appears on the Financial Services Register.
What Are the Equity Release Set-up Costs?
The initial charges on equity release are advice and application fees. The advice fee is for an independent financial adviser who will guide you through the entire process.
What Fees Will You Pay on Lifetime Mortgages & Home Reversion Schemes?
To release equity through a lifetime mortgage and a home reversion scheme, you will generally pay for a financial adviser, an application fee, arrangement fees, the cost of a valuation, and solicitor’s fees. In addition, you will pay compound interest on the loan you’ve unlocked. Other fees you might end up with are early repayment charges. An early repayment charge is a penalty that you might incur if you end your plan early.
When releasing equity, your property will need to undergo a detailed property valuation to determine its exact worth. This will give the lender a clear indication of the loan amount that they are willing to offer. Some lenders will offer a free valuation.
You will need to hire a solicitor to represent you through the equity release process, hence there are legal costs involved. They will do all the legal work that comes with unlocking an equity release product.
A less common equity release cost application fees, but some lenders charge a percentage of the cash you’ve unlocked as an application fee; between 1.5% and 2% of the total equity.
An equity release adviser is probably the most important equity release cost. When releasing equity, your first step is to hire a financial adviser. Their role is to guide you through the entire process and help you find the best solution for you and your family. We suggest a whole-market financial adviser.3
Here’s more: Getting the Best Equity Release Advice
What Is the Total Cost of a Lifetime Mortgage?
The total cost of a lifetime mortgage, the most popular form of equity release, is between £1,500 and £3,000, plus compound interest. However, there is an option to repay the monthly interest on your lifetime mortgage, and up to 10% of the loan amount annually, reducing the total costs.
What Interest Rates Do You Pay on Equity Release?
The equity release interest rates you will pay are either capped variable interest rates, or fixed interest rates, both of which are compound interest. The interest rate you will achieve on your loan is based on current market trends, how much equity you unlock, your age, the value of your property, and the condition of your health.
Wondering how much cash is tied into your home? Try our FREE equity release calculator right here.
‘Rolled-Up/Compound Interest’ Explained
Equity release lenders will charge rolled-up or compound interest rates for those releasing equity. Compound (or roll-up) interest is the interest on a loan that is calculated based on both the initial loan and the previous period’s accrued interest.
How Low Equity Release Interest Rates Can Affect Your Payments
A low equity release interest rate will affect your payment as the lower the interest, the less your family will owe at the end of your loan period. Compound interest is a type of interest that grows at a faster rate than simple interest, which is calculated only on the principal amount. It may be regarded as “interest on interest,” since it builds upon itself and results in a sum growing at an accelerated rate than simple interest, which is based solely on the principle sum.
Can You Pay the Interest on Equity Release?
Yes, you can pay back the interest on your equity release loan. You can do so if you opt for voluntary repayments lifetime mortgages or an interest-only lifetime mortgage. In addition, you aren’t obligated to pay back the interest so you can switch plans at any time.
When Do You Pay Your Equity Release Fees?
You will pay your various equity release fees at different times throughout the process.
- Surveyor’s Valuation – If applicable, your surveyor’s fee will be paid with the equity release application. Most lenders will allow you to use some of the equity you unlock to cover this fee.
- Lender’s Application Fee – If this your lender requires an application fee, you’ll generally pay this when you receive your tax-free cash.
- Advice Fee: If you’re using an independent financial adviser, you can request to pay them when the funds have been released. Note that some lenders off free advice, but it won’t usually be whole market advice.
- Solicitor Fee: You will usually pay your solicitor from the funds you unlock.
- Completion Fee: Some lenders expect a completion fee, but they will be upfront about it from the get-go. This fee is paid with the final repayment when your home is sold at the end of the loan period.
Can You Pay Back Equity Release Early?
Yes, you can pay back your equity release early, but you will likely incur early repayment charges. These can be between 2% and 8% of the total loan value, depending on when you originally unlocked equity. Some lenders allow you to pay up to 10% of your loan off early, without incurring penalties.
How Else Can You Reduce the Costs of Equity Release?
You can reduce equity release costs through using a whole-market financial adviser, by opting for a drawdown lifetime mortgage, or by choosing a voluntary payment or interest-only scheme.
- Drawdown Lifetime Mortgage – Your money will go into a drawdown facility and you’ll only pay interest on the money you release.
- Whole-Market Financial Adviser – These advisers have access to the entire industry, helping you find the lowest interest rate possible.
- Voluntary Repayment Plan – Select an equity release scheme that gives you the option to pay a minimum of £25 of your loan monthly, and up to 10% annually.
- Interest-Only Scheme – You can stop the interest from compounding with this lifetime mortgage option, reducing the overall cost of your equity release.
Is Equity Release a Competitive Means of Borrowing?
Yes, with interest rates at an all-time low, equity release is a competitive means of borrowing. While interest rates were once sitting above 6%, you’re now on an average below 4%. Residential mortgages have similar rates, starting at 1.6% for 5 years, with variable rates around 3.54%. However, what makes equity release stand out is that no payments are required in your lifetime.
More information: Equity Release Interest Rates in Jan 2022
Why Is It Important to Seek Professional Advice?
Equity release advice may help you obtain a mortgage with the lowest equity release interest rate and costs. Some equity release solutions, for example, charge penalties for early repayment. You can downsize and pay off the mortgage penalty-free if you discover a service without an early repayment fee.
Do You Pay Tax on Equity Release?
No, there are no tax implications with equity release. The cash you release through a lifetime mortgage or home reversion scheme is completely tax-free. This is because it is seen as a loan and not income.
How Much Does Equity Release Cost?
Generally, initial costs will apply, and then interest will be charged as well. Interest rates are extremely low at the moment: 2.25%! So it’s a great time to consider equity release. Some providers don’t even charge an admin fee anymore, due to the popularity increase and competition among providers/lenders.
What's the Catch With Equity Release Costs?
You’ll receive a cash lump sum, or you can opt to receive a regular income from your released funds. The catch is you’ll need to repay that money when you die or need into long term medical care. Plus all the additional costs that they don’t always tell you about. So, make sure you’re in the know before taking out a plan.
Is Equity Release a Bad Idea Due to Extra Costs?
It could be a good idea because it’s tax-free cash from your home, without worrying about monthly repayments. It could be bad if you don’t want your heirs to have a different inheritance than they would’ve if you didn’t take money from your property through equity release.
However, it all comes down to your specific financial situation and what you can afford. Some people find that equity release plus all the costs are more cost-effective than other alternatives. Speak to a financial adviser to find out if it’s a bad idea for you or not.
Who Is Best for Equity Release when it comes to costs?
Here are the top 5 equity release providers:
- LV with their low repayment charges.
- Just with their simplicity.
- Legal & General if you want a big loan.
- Aviva if you’re elderly.
Releasing cash from your home can be one of the best decisions of your life if done with professional guidance. While you can save in some ways, don’t be scared to pay for the best products and assistance out there as it will benefit you in the long run.