If you’re considering equity release, you’re probably wondering what costs are associated with it.
Like regular mortgages, there are various costs associated with releasing equity.
These costs include initial charges and interest rates.
What are the initial charges involved with equity release?
The initial charges of equity release depend on which provider you go with and which product you select, but typically they will include fees for advice and application fees (including legal costs).
Usually, you can expect to pay for advice from a financial adviser who will carry out research into the options available and recommend the most suitable plan for you.
The application fee, also known as arrangement fee, is similar to when you take out a regular mortgage. It typically covers the set up and the provider’s legal costs when arranging your equity release plan.
Lending charges will vary, depending on the lender.
With the SunLife Equity Release Service, you can access initial advice free of charge from our partner, Age Lifetime – and there’s no obligation to continue if you don’t wish to.
Use our 60 second equity release calculator
Use our 60 second equity release calculator
Use our equity release calculator
Use our 60 second
equity release calculator
Release tax-free cash from your home
What are equity release interest rates?
At the moment the average interest rate across all lifetime mortgages is the lowest it's ever been at 3.95%1. On average, people who have used the SunLife Equity Release Service access an interest rate of 3.23%2. However, depending on your circumstances, there are many plans available with rates lower than 3%.
Read more on how equity release interest rates compare.
How much your interest amounts to at the end of your lifetime mortgage will depend on how long it runs for (remember, it’ll come to an end when you sell your home, when you pass away or move into permanent care) and which type of plan and interest rate you choose.
For example, with a roll-up lifetime mortgage (which gives you your tax-free cash in one lump sum), the interest on your loan is ‘rolled up’ and it ‘compounds’ each month or every year depending on the plan you choose.
This means that the amount you owe to your lifetime mortgage provider grows every year.
‘Rolled-up/compound interest’ explained
Here’s a simple explanation of how rolled-up/compound interest works with a roll-up lifetime mortgage:
- At the end of the first month or first year (depending on your plan), the amount of interest charged is added to the original loan
- The following month or year, the interest will be ‘compounded’ – meaning it’s calculated based on the sum of the original loan, plus the interest charged during the first month or year
- This process continues in the same way for every month or year that follows
- So, even though the interest rate can stay the same, the amount you owe to your provider will be calculated every month or every year based on the larger amount
Do I pay tax on equity release?
No, you do not have to pay tax on equity release. When you take out an equity release scheme, you receive a tax-free sum. This is because it is a loan, rather than a form of income.
The money is yours to do with as you like. Depending on what you do with the money, there may be tax implications.
For example, if you decide to give your family an advance on their inheritance, but die within 7 years, Inheritance Tax may be payable.
Equity release may also affect your eligibility for state benefits so make sure you ask all the necessary questions when you speak to a financial adviser.
How do lifetime mortgage rates compare?
The actual rate you secure when taking out an equity release plan will depend on your individual circumstances, requirements and the product selected.
To give you an indication of how much different rates could affect the amount you owe, the tables below show how much you might owe over a period of five, ten and fifteen years with example compound interest rates of 4%, 5% and 6%.
Based on an annually rolled up lifetime mortgage loan of £50,000 with a compound interest rate of 4%.
|Year||Loan||Interest at 4%||Total owed|
Based on an annually rolled up lifetime mortgage loan of £50,000 with a compound interest rate of 5%.
|Year||Loan||Interest at 5%||Total owed|
Based on an annually rolled up lifetime mortgage loan of £50,000 with a compound interest rate of 6%.
|Year||Loan||Interest at 6%||Total owed|
Please bear in mind these figures are presented as examples only. Your individual circumstances, the product selected and your lifespan will affect the amount you pay.
Can you pay the interest on equity release?
Some lifetime mortgages give you the option to pay all or some of the interest off.
If you decide to pay some or all of the interest, the mortgage will cost less in the long run.
This varies from lender to lender and should be considered when talking to an adviser.
With a lifetime mortgage where you can make monthly payments, the amount you can repay might be based on your income.
Can you pay back equity release early?
This will depend on your equity release provider. Some providers may allow you to pay back the money early, but you may face early repayment fees.
As with any early repayment fees, they can be quite expensive so you’ll need to get advice from your provider and independent financial advice before making any decisions.
Some new plans may offer fixed-term early repayment charges, so it’s important to research and find the best plan for you. Whether or not you wish to repay your equity release plan early will depend on your financial situation.
Your adviser will be able to help you find a plan that meets the criteria you need.
What other costs are there?
When you first buy your home, a survey needs to be conducted in order to get a mortgage.
This also applies when taking out equity release.
A surveyor will be needed to check the property and report their finders to the lender you decide to go with.
Lenders will usually secure a valuation for you.
Whenever working with a surveyor, always make sure they are RICS registered.
If you decide to ahead with releasing equity, you’ll need to appoint a solicitor to take care of all the legal work on your behalf.
Your solicitor will work with you to make sure everything is in order up until your money is released.
When do you pay the fees?
|Fee||When it's due|
|Financial advisor||If applicable, these can be paid upfront, out of the loan or added to the loan|
|Provider’s administration or application fees||If applicable, this is usually paid when your plan begins, and you receive your money|
|Interest rates||With a lifetime mortgage, these are usually paid when you sell your home, pass away or move into permanent care|
|Surveyor||If applicable, this is usually paid with the application|
|Solicitors fee||This is typically paid when you receive your money on completion.|
What is the total cost of releasing equity?
All of the charges involved can add up to as much as £3,0003.
The costs can vary so much because of the different factors that make up the overall cost.
For example, equity release lenders charge different application fees. Some may not charge for this at all and others may structure their plans so that they offer cash-back that will cover the cost of these fees for you.
It’s important to thoroughly research the market and get the correct advice so you can decide what plan is right for you.
If you’re considering releasing equity, then it’s important to consider the pros and cons and get expert advice before making any final decisions.
It’s worth noting that if you have any outstanding mortgage balance on your home, you’ll need to use the equity you release to pay this off. You can spend the remaining cash as you like, for example to help your family or boost your retirement income.
A financial adviser can talk you through the details – including the costs of equity release – so you can decide whether it’s the right option for you.
1. Research conducted by moneyfacts.co.uk
2. Based on Age Lifetime completions between 01/06/20 and 31/12/20.