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.
Last updated 06th December 2019
What are the initial charges?
This depends on which provider you go with, but typically the initial charges will include
- Financial advisor
- Application fees
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 is like when you take out a regular mortgage.
This cost typically covers the set up and legal costs when arranging your equity release plan.
The lender decides how much they charge, so this cost can vary.
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.
That’s one way to help keep some of the costs down.
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
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What is the interest rate on equity release?
On top of the set-up charges, you also need to consider interest rates.
Today, interest rates on lifetime mortgages products are usually between 4% and 6% – and this can be fixed for the life of your loan. 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 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
The table below shows a clear example – based on an annually rolled-up lifetime mortgage loan of £50,000 with an interest rate of 4%^.
|Year||Loan||Interest at 4%||Total interest||Total owed|
Source: Equity Release Council
^ The actual rate available will depend upon your circumstances. The plans above are just some of the lifetime mortgages that are available, but there are many other plans available and these terms and rates can change at any time.
How do interest rates compare?
The actual rate you secure when taking out equity release will depend on your individual circumstances, requirements and the product selected.
In their Spring 2019 report, the Equity Release Council suggests that the average product rate in January 2019 was 5.21%.*
To give you an indication of how much different rates could affect the amount you owe, read more on lifetime mortgage interest rates.
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 you less in the long run.
This varies from lender to lender and should be considered when thinking about releasing equity.
With a lifetime mortgage where you can make monthly payments, the amount you can repay might be based on your income.
FREE SunLife Equity Release Calculator – see how much cash you could unlock.
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 choose the surveyor 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 tax-free cash is released.
Again, lenders will usually be able to help you find a solicitor.
When do you pay the fees?
|Fee||When it's due|
|Financial advisor||If applicable, this is usually paid with the application or added onto the final mortgage|
|Provider’s administration or application fees||If applicable, this is usually paid when your plan begins, and you receive your tax-free cash|
|Interest rates||With a lifetime mortgage, these are 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 tax-free cash on completion.|
What’s the total cost?
All of the charges involved can amount to between £2,000 and £3,000.**
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 won’t charge for this at all and others structure their plans so that they offer cash-back that will over 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 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.
A financial adviser can talk you through the details – including the cost of equity release – so you can decide whether it’s the right option for you.