Interest rates on equity release
Interest rates on equity release have come down a good deal in recent years as more providers have entered the market. Typical lifetime mortgage rates currently sit at around 5% to 7% fixed for life, depending on the plan and your circumstances. Fixed rates are the norm here, so your rate stays the same for as long as the plan runs.
Those rates might look close to what you would pay on an ordinary mortgage, but there is one big difference: with most equity release plans you make no monthly payments. The interest compounds instead, so you end up paying interest on interest, and the debt grows faster than most people expect.
How compound interest affects the total cost
Compound interest is the biggest long-term cost of equity release. Say you release £100,000 at a 6% fixed rate and make no payments. After 10 years you would owe roughly £179,000, after 15 years around £240,000, and after 20 years about £321,000. At 6%, the debt roughly doubles every 12 years.
That is why it makes such a difference to release only what you actually need. Many lifetime mortgages now come with a drawdown facility that lets you take the money in stages. You only pay interest on what you have drawn so far, which can cut the total interest bill over the life of the plan by a fair amount.
Setup fees and charges
On top of the interest, there are a few upfront costs to budget for. You will usually see an application or arrangement fee of £500 to £1,500, a property valuation fee of £300 to £600, solicitor’s fees of around £500 to £1,000 for the independent legal advice, and an adviser fee that is either a set amount or a percentage of what you release.
Some plans also carry a completion fee, and if you make voluntary repayments there can be an early repayment charge when you pay back more than the plan allows. Always ask for a full breakdown of every fee before you commit to a plan.
Impact on your estate and inheritance
The biggest financial effect of equity release is on the value of your estate. Because the debt grows over time through compound interest, there can be a lot less left for your beneficiaries. If property prices happen to rise faster than the interest rate, some of your equity growth is protected, but there is no guarantee of that.
Many plans now include an inheritance protection guarantee, which lets you ring-fence a set percentage of your home’s value for your beneficiaries. You might protect 25% of the property’s eventual sale value, for instance. It lowers the amount you can borrow, but it locks in a minimum inheritance.
Understanding the full cost with Clearview
At Clearview Mortgage Solutions we give you detailed illustrations that show exactly how the costs of equity release build up as the years pass. We model different scenarios so you can see the effect on your estate at various points down the line and decide with your eyes open.
We will also talk through cheaper ways to reach the same goal where they exist, such as a retirement interest-only mortgage or downsizing. Contact us for a free, no-obligation consultation.