The cost of equity release depends on the product you choose. Charges for lifetime mortgages include initial set up fees plus interest accrued. Whereas the cost of releasing equity with a home reversion plan includes arrangement fees for selling a percentage of your property but no interest.
The following guide explains the costs involved in arranging both types of equity release.
How much does equity release cost with a lifetime mortgage?
Using a lifetime mortgage to release equity from your home involves paying for a number of professional services, so it's important to budget for these. According to the Equity Release Council, the average cost of arranging a lifetime mortgage is between £2,000 and £3,000, made up of the following fees and charges:
1. FEES FOR FINANCIAL ADVICE – payable when your plan is set up
It’s important to get independent financial advice from a professional, reputable equity release specialist. Your adviser will help you decide if equity release is the right path for you and ideally research the whole market to find you the best deal from the most suitable lender .
Age Partnership is a market-leading, independent equity release specialist able to compare the whole market on your behalf, which is one of the reasons why we have chosen to partner with them.
They have negotiated preferential rates with many lenders, some of which are exclusive to them. They also do all they can to negotiate reduced set-up costs and sometimes even cash back on completion.
Most equity release advisers offer the initial consultation free of charge. If you go on to apply based on their advice, you pay a fee at that point. Age Partnership typically charge 1.95% of the cash sum you release or a minimum fee of £1,395, payable once your equity release mortgage has been set up.
Proceed with caution if you’re asked to pay for advice upfront.
2. FEES FOR ARRANGING THE MORTGAGE - payable upfront or added to the loan
Arrangement fees cover the set-up of your mortgage and will vary depending on your lender. It could be a set amount of between £500 and £1,000, or a percentage of the loan value. These fees are payable once your lifetime mortgage is in place either as a one-off payment or by adding it to the sum you're borrowing – if so, you'll pay interest on it.
3. FEES FOR VALUING YOUR HOME – payable upfront if charged
If you took out a mortgage when you originally bought your home, you would have had a survey conducted to satisfy your lender of the property’s market value; the same applies to an equity release mortgage.
Your lender will usually arrange the valuation for you, often free of charge. Some lenders do charge but might also offer extra benefits, that balance out this cost.
4. Fees for independent legal advice – payable upfront
Releasing equity from your home using a lifetime mortgage is a big decision, and it's important to get the right advice at key points along the way.
If you decide to apply for equity release, the Equity Release Council’s rules require you to consult with an independent solicitor with no connection to your mortgage lender. You must also have at least one meeting with this solicitor before you proceed.
This is a valuable step in the process; designed to ensure you understand exactly what you are committing to, and that you are making your decision for the right reasons without any undue influence from your adviser.
Equity release interest rates explained
Equity release interest rates have dropped over recent years. So, releasing equity is cheaper than before, however still more expensive compared to a standard mortgage. Interest rates can either be fixed or variable with a cap and range from 3% to 5%, although some companies now offer rates below 3 including our preferred independent equity release specialist Age Partnership.
You only pay interest on the equity you have released, not money held in reserve. Therefore, if you don’t need the cash in one go, a drawdown mortgage will save you money as you only pay interest on the funds you have drawn.
In addition, it's worth keeping in mind that although the cost of your equity release loan increases, hopefully so will the value of your home.
What is compound interest?
Compound interest is when you pay interest on top of the interest already accrued, in addition to the loan. Also known as rolled up interest, the interest is charged on either a monthly or annual basis, depending on the lifetime mortgage you choose.
For example, if interest is added monthly, the interest accrued at the end of the first month is added to the loan. You then pay interest on the loan plus the interest already added. This ultimately means that at the end of each month, the size of the loan grows.
Here is a simple example of how compound interest works:
||6% Interest Rate
|This is the Equity Release Council’s example of how the annual payments on a £50,000 loan with an interest rate of 6% could work
How much does equity release cost with a home reversion plan?
The cost of a home reversion plan consists of set-up fees and the loss in property value, as you will a) receive significantly less than current property prices for the sale of your home, and b) no longer benefit from house price rises on the percentage of your property that you've sold.
The initial cost of arranging a home reversion plan will consist of the following:
- Fees for professional help and advice when setting up your plan.
- An arrangement fee to the equity release provider.
- A valuation charge: the agreed value of your home will depend on the official valuation, so make sure you arrange an independent service; never accept a price suggested by the equity release company.
- Legal fees: again, make sure you get independent advice and have the terms of the agreement thoroughly checked by your own solicitor – not someone proposed by the equity release provider. Your solicitor will help to ensure you understand all the details of your plan and are happy with the arrangements.
Once you've set up your plan, you may have to pay maintenance costs for keeping your house in a reasonable condition. With a reversion plan, you’re technically renting your home and are no longer the owner. This also means you can't make any major home improvements.
There is no interest to pay on this kind of equity release plan. You can continue to live in your home rent free for life or until you move into permanent care.