We’ve all been there,
Understanding equity release costs can be confusing, but it is essential to know what you are getting into. Equity release is a way for homeowners to access some of the funds they have invested in their home by either selling their property or taking out a reverse mortgage.
When you take out an equity release plan, your lender will agree to give you back some money from the sale of your property (or part of your home), giving you more freedom and control over how you spend your retirement years.
What Is Equity Release?
Let’s get this started!
The equity release strategy is a way of releasing funds from the value of your property. To do this, you need to convert part or all of the home’s equity into cash that can be used by someone who needs it – such as yourself.
There are two ways in which you can take out an equity release plan:
Let me show you:
First, an annuity purchase plan allows you to receive regular income payments for life and guarantees that some capital will remain with heirs when selling your house (sometimes known as ‘lifetime drawdown’).
A lifetime mortgage scheme simply converts your property’s value into a lump sum at today’s valuation, so there are no ongoing payments, and any money left over after selling may go to family members.
Both types have advantages and can suit different situations.
Exactly How Much Does Equity Release Cost?
There are different ways of calculating costs, but the most common is an estimate from a solicitor. This can cost anywhere between £600 and £2000 for a smaller equity release plan to over £3000 if you’re looking at releasing more funds.
Applying for an equity release plan does not come with any guarantees about how much money will be available when it comes time to sell your house – this could vary depending on factors such as property values and mortgage rates. So it’s important to understand these risks before deciding whether or not this type of funding is right for you.
What Are the Equity Release Set-Up Costs?
There are two types of set-up costs:
Let’s have a closer look:
The first is a fee to establish the plan, and this can be either paid as an upfront lump sum or by taking out monthly premiums. The second type of cost relates to administration, which includes all ongoing charges for keeping the account open and running until you die.
The other set-up cost is the insurance to cover any shortfall in your pension fund. This can be a single upfront charge, or it may be taken out as monthly premiums over the plan’s term.
If you have an existing mortgage, this will also need to be paid off before releasing equity from your property. There are no restrictions on how much money you borrow against your home, so long as it’s still worth more than what is owed on it.
Some providers offer schemes whereby they take responsibility for all future valuation adjustments without incurring additional administration charges.
These types of plans usually come with higher upfront costs. Still, ongoing expenses which might otherwise reduce returns from the investment element are covered by them instead, ensuring that lifetime release mortgages provide a better return on investment.
What Fees Will You Pay?
There are only two fees you will incur: a release fee and an administration charge.
The release fee is typically between £1000 and £5000. However, this varies from provider to provider – you must check the terms of your mortgage before deciding on what type of plan suits you best.
An administration charge might be up to around 50% of the value released, so again, make sure that there are no hidden surprises by checking the details of your regular mortgage.
You will also incur a stamp duty charge1, but this would be for any equity release you might need to do – not just with lifetime mortgages.
Stamp duty charges vary from region to region. They can range anywhere between 0% (Scotland) and 15%, depending on where in England or Wales you live.
If it’s higher than that, then there are typically exemptions available, so make sure you check with HMRC2 before taking out a plan.
What’s the Total Cost?
The total cost of equity release is the amount of money you get plus any costs that need to be paid.
Again, this will depend on what types of equity release plans are taken out and how much needs releasing.
Still, it can vary from as little as a few hundred pounds up to tens or even hundreds of thousands, depending on your requirements.
There are three types of charges: Administration fees (upwards 50% in some cases), stamp duty (usually less than 15%), and reversionary interest rates, which may apply if someone takes out an annuity income drawdown – typically, this would work at about £25 per month for every £250,000 released.
So when taking into account those three charges, the total cost can vary from as little as a few hundred pounds up to tens or even hundreds of thousands.
When Should You Pay Your Equity Release Fees?
The best time to pay your equity release fees is just before you’re due to start drawing them down.
If not compulsory in some cases, it may be tempting for a person to take out an annuity income drawdown. Typically, this would work at about £25 per month for every £250,000 released.
Suppose you defer paying the fees until after your pensions have been drawn down. That case will incur further costs, which could easily double or triple what they otherwise might have been.
So it can end up costing more than three times as much as there wasn’t any point delaying payment of these charges unless necessary.
It’s also worth noting that interest rates on money taken out from equity release schemes are usually higher than they would be in a savings account or on investment.
Furthermore, the equity release charges (or “release fees”) can cost as much as ten percent of your pension fund and will only increase with time.
This is because it considers not just what you’re owed but also any interest accumulated during this period that needs to be paid back from future income flows.
What does this mean?
This means that although these charges may seem high initially, there’s no escaping them when due. So it’s better if they are organized early enough before retiring for you to have more freedom over where else your money goes after release by paying off debts or spending on other things such as leisure activities!
What Interest Rate Will I Pay for my Equity Release?
The interest rate you will pay on your equity release loan is determined by several factors.
This includes how much money you have and what it can be used for, and other lenders’ rates available at the time. Interest rates are typically higher than a mortgage or personal loans because they are longer-term investments.
The interest rate you will pay on your equity release loan is determined by several factors. This includes how much money you have and what it can be used for, and other lenders’ rates available at the time.
Interest rates are typically higher than a mortgage or personal loans because they are longer-term investments.
Typically, people who need help paying their living expenses during retirement may find that they can afford to repay an equity release over ten years if they had around £60,000 in savings (assuming a small amount of income).
However, some providers may charge more, but this could depend on the nature of a person’s property and where it is located – both key considerations when deciding on which equity release providers to use.
Do I Need to Pay Tax on Equity Release?
Interest paid on a secured equity release is usually not taxed. However, if the interest rate exceeds £50 in any one year, it may be necessary to pay tax on this income.
It’s worth noting that there are no restrictions or limits when taking out an equity release – unlike with cash savings which can only have up to 75% withdrawn without incurring penalties (unless this is to pay off a mortgage).
This means that individuals can borrow as much as they like and pay it back at their speed. In most cases, this will equate to an individual paying interest back at the same rate as they borrowed.
However, suppose a borrower wants lower debt repayment levels. In that case, it may be better for them to take out a home equity conversion mortgage (HECM) – which is typically cheaper than secured loans but has more stringent age restrictions and qualifying criteria.
Essential Things You Should Consider
Are you liable for any other secured debts? If so, these will need to be paid off before taking out the equity release – or a plan must be in place with your solicitor.
Will, there still be funds from which an individual can repay their loan after all of their assets have been taken into account?
Let me explain,
Suppose someone has more than one property they are considering releasing equity from. In that case, they should think about whether it is worth selling down to just one to ensure ease of repayment.
Does the individual want lower levels of debt repayment? In this case, a HECM may prove cheaper but needs stricter qualifying criteria and age restrictions.
How much does each option cost upfront? First, it’s worth noting that the costs of an equity release scheme vary massively according to how much you’re borrowing, so it’s worth getting multiple quotes from different providers.
What will be deducted from the loan? This is an important consideration as some schemes only take out a percentage of your home’s value rather than 100%.
Is there protection for family members if something happens to me? There are two types of life cover, one with monthly premiums and one without, which can offer this level of security.
What Are the Costs When I Choose A Lifetime Mortgage Specifically?
The cost of lifetime mortgages is around the same as monthly mortgage costs, with a repayment charge of between 0.75% and 11%.
The size of your loan is also likely to be much higher than that for equity release because it’s designed to provide you with funds and repay any debt on your mortgage.
The cost for a lifetime mortgage is what you can afford to pay monthly on top of your current commitments, and the size of this will depend on how much money you want in the end.
It’s not just about costs either because there are other considerations too: tax liabilities; whether it makes sense financially or emotionally to release equity from your home when you have no children who may inherit it as an asset (and so avoid inheritance taxes); and if access to all that cash means you’ll be able to give up some work that supports your lifestyle.
What Interest Is Charged On Equity Release?
The interest is typically around five per cent, and it’s added to the capital at 12 monthly intervals. It means that if you borrow £200k, there would be about £60-£70 of monthly repayments for your lifetime mortgage, depending on various factors like how much money is paid off each year.
How Much Does An Equity Release Solicitor Cost?
The legal cost of a solicitor for equity release is typically around £500-£600.
What Are Equity Release Interest Rates?
Interest rates on equity release can range from the low-single digits to over 16%.
What Are The Initial Charges Involved With Equity Release?
The initial charges for equity release are usually around £500, deducted from the amount you borrow.
In simple terms:
The equity release initial costs are calculated based on the value of your property and how much you want to borrow. Equity releases can help retirees pay for care and grandchildren buy their own homes, and children fund further education.
In a nutshell, this is what we’ve covered today – understanding why people use equity release products, who they’re suitable for, when it’s right to consider them as an option, and finally, some tips about borrowing against your retirement home.