When it comes to equity release, one of the most common questions we get asked is how much does equity release cost? What most people usually mean by this is what are the interest rates. It’s important you understand the costs and how interest rates work before going ahead with any recommended plan.
Interest rates
Over recent times, we’ve seen that the interest rates with a lifetime mortgage have risen. In 2021, it would have been possible to take out a rate at around 2%. However recently (updated 2024), interest rates have been considerably higher. With a lifetime mortgage, the interest rates are fixed and it’s your choice whether you want to pay off the interest.
An independent equity release adviser will be able to search the whole of the market to find an interest rate which is best suited to your current and future needs.
If you have already taken out an equity release plan, you may find that the current interest rate on your plan is no longer competitive. Switching your equity release plan allows you to take advantage of lower interest rates which may be an opportunity to save on your existing lifetime
mortgage.
Early repayment charges may apply when switching your equity release plan. An independent equity release adviser will be able to tell you more. The service we offer is a review service for our customers who already have a lifetime mortgage. Our independent equity release advisers will be able to let you know if it’s more cost effective to stay with your current lender or to
switch to a new lender.
Ad hoc payments
As of Wednesday 28th March 2022 [1] , the Equity Release Council added a fifth product standard allowing customers to make penalty free payments on their equity release plans. This means customers can make payments on the equity release plans. As and when they choose subject to lending criteria. The change has been made to help reduce the effects of compounding interest and to reduce overall borrowing costs for equity release customers.
Payments can be made through fixed monthly payments, or you can make payments as and when you choose. If you don’t want to make any payments. You can simply let the interest roll up. This means the interest is added to the balance of the loan each month or year depending on your plan, so the amount owed can build up quickly.
CEO of the Equity Release Council Jim Boyd stated: “Our new product standard adds to this by ensuring people have the freedom to reduce their borrowing if circumstances change. It enables equity release customers to mitigate the effects of compound interest. And reduce their borrowing costs in later life, which we know is often one of their main concerns.
The market’s evolution means many customers are already saving tens of millions of pounds in interest costs. By making penalty-free partial repayments as and when they can afford to. By introducing the new product standard, we expect many more customers are set to benefit as all
new products will have this safeguard built-in.” [1]
Important to note
- A lifetime mortgage is a loan secured against your home and subject to compound interest, meaning the amount you owe can grow quickly.
- Equity release will reduce the value of your estate.
- Equity release may leave you with limited or no property equity remaining.
- Equity release may affect your entitlement to means-tested benefits.
- Equity release will reduce your financial options in the future.
Compound interest
With a lifetime mortgage, generally the interest is added to the loan and is known as compound interest.
The good news is, if it’s a priority to leave an inheritance to your loved ones. This can be achieved by building in an inheritance protection guarantee. You will also be able to make voluntary ad hoc payments of interest and capital.
At Retirement Solutions, we only recommend lifetime mortgages approved by the Equity Release Council and these come with a no negative equity guarantee. This means regardless of how much interest has built, you will never owe more than the value of your property, and no debt will be passed onto your loved ones.
Independent equity release advice
When it comes to equity release, it is important you understand the costs that will come with your plan.
It’s important you understand the costs and how interest rates work, before going ahead with your recommended plan. This includes the overall interest rate, compound interest. Furthermore how you can make payments to reduce the interest rate increasing your overall borrowing.
A Retirement Solutions equity release adviser has access to the whole of the market. So can find a plan suited to your current and future needs. You can book an appointment with an independent equity release by requesting a call back, or you can call us on 0800 043 0725.
