If you’re thinking about unlocking money from your home, you’re probably wondering about the cost of equity release. We’re here to help with our quick and easy guide.
Equity release is a popular way to unlock tax-free cash from the value of your home. And for many, the fact that money doesn’t have to be repaid during your lifetime is part of the appeal.
Nonetheless, there are still costs attached to equity release plans – including initial charges and interest rates – so it’s well worth being in the know about what to expect.
Before we explore the cost of equity release, here’s a quick reminder…
How does equity release work?
Equity release is available to homeowners aged 55 and over. It enables you to access cash tied up in your home – so you can boost your income in later life without having to downsize. The money you release is yours to spend as you wish.
A lifetime mortgage is the most popular type of equity release plan. Typically, this enables you to way to borrow money against your property, while maintaining 100% ownership. You won’t have to worry about making monthly repayments either. Instead, your loan plus the interest accrued over the years is repaid when your home is sold when you pass away or move into permanent care.
Thanks to the no-negative equity guarantee, the amount you owe can never exceed the value of your home – so you know you won’t leave your family with debt to pay.
What are the initial charges?
This depends on which provider you go with. Before you decide to take out an equity release plan, make sure you seek advice from an independent equity release adviser – and they can talk you through your options.
Usually, you can expect to pay for advice from a financial adviser (if you end up taking out an equity release plan), plus the provider’s administration or application fees. There may also be solicitors’ fees (for conveyacing, for example) and a charge for a surveyor to value your property.
Overall, these intial charges can amount to between £2,000 and £3,000*. But with the SunLife Equity Release Service, you can access initial advice free of charge from our partner, Age Partnership – 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.
* According to the Equity Release Council
What about equity release interest rates?
On top of the set-up charges, you also need to consider interest rates.
Today, interest rates on lifetime mortgages products are usually between 5% and 6% – and this can be fixed for the life of your loan.
How much your interest amounts to at the end of your lifetime mortgages 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
It sounds complicated, but it’s pretty straightforward really. 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 simply 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 6%^.
|Year||Loan||Interest at 6%||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.
FREE SunLife Equity Release Calculator – see how much cash you could unlock.
You can still leave an inheritance
Because your equity release plan will be paid off through the sale of your home, it’s true that you won’t be able to leave your property or the full value of your property to your children. But any money left over after the loan and interest has been paid will go to your estate. So it’s still possible to leave an inheritance.
If leaving an inheritance for your loved ones is really important to you, you can choose a plan with inheritance protection. This is a way to ringfence a portion of your home’s value as a legacy. Be sure to tell your independent equity release advisor about your preferences when you meet them – that way, they’ll be able to find an equity release plan that works for you.
It’s time to seek advice
If you’re considering equity release, then it’s important to get independent advice before making any final decisions. 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.
Article correct as at 28/04/2018