Interest rates on equity release
Interest rates on equity release plans have fallen significantly in recent years due to increased competition in the market. Typical rates for lifetime mortgages currently range from around 5% to 7% fixed for life, depending on the plan and your circumstances. Fixed rates are the norm, which means your rate will not change for the life of the plan.
While these rates may seem comparable to standard mortgage rates, the crucial difference is that with most equity release plans, you do not make monthly payments. Instead, the interest compounds, meaning you pay interest on interest. This causes the debt to grow much faster than you might expect.
How compound interest affects the total cost
Compound interest is the biggest long-term cost of equity release. As an example, if you release £100,000 at a 6% fixed rate and make no payments, after 10 years you would owe approximately £179,000. After 15 years, around £240,000. After 20 years, approximately £321,000. The debt roughly doubles every 12 years at 6%.
This is why it is so important to only release what you need. Many modern lifetime mortgages offer a drawdown facility that allows you to take money in stages. You only pay interest on the money you have actually drawn, which can significantly reduce the total interest cost over the life of the plan.
Setup fees and charges
In addition to interest, equity release involves several upfront costs. These typically include an application or arrangement fee of £500 to £1,500, a property valuation fee of £300 to £600, solicitor’s fees for independent legal advice at around £500 to £1,000, and adviser fees which may be a fixed amount or a percentage of the amount released.
Some plans include a completion fee, and if you want the flexibility to make voluntary repayments, there may be an early repayment charge if you repay more than the allowed amount. Always ask for a full breakdown of all fees before committing to a plan.
Impact on your estate and inheritance
The most significant financial impact of equity release is the reduction in the value of your estate. Because the debt grows over time through compound interest, the amount left for your beneficiaries can be substantially reduced. If property prices rise faster than the interest rate, some equity growth may be preserved, but this is not guaranteed.
Many plans now offer an inheritance protection guarantee, which allows you to ring-fence a percentage of your home’s value for your beneficiaries. For example, you might protect 25% of the property’s eventual sale value. This reduces the amount you can borrow but ensures a minimum inheritance.
Understanding the full cost with Clearview
At Clearview Mortgage Solutions, we provide detailed illustrations showing exactly how the costs of equity release build up over time. We model different scenarios so you can see the impact on your estate at various points in the future and make an informed decision.
We’ll also explain alternatives that might achieve the same goal at lower cost, such as retirement interest-only mortgages or downsizing. Contact us for a free, no-obligation consultation.