I think you’ll agree with me when I say…
There’s a number of things to learn when it comes to understanding of how does equity release work. Like any other financial product, equity release plans such as lifetime mortgages and home reversion plans, carry interest, fees and other insurance and administrative fees.
However, with a thriving economy, ever-rising living standards, stable cash flow and unscrupulous lenders cropping up every day in your life, you can get yourself in a pickle, especially if you will soon have no cash flow also preparing for retirement and have no clue about equity release charges work.
Lucky for you, here’s a comprehensive guide that will help you understand what is equity release and how all the percentage, fees or insurance and costs work in taking out an equity release plans.
What You MUST Know
We’ve summed up the most important information about the topic in this quick video.
Understanding Equity Release Costs
If you are property rich but has no stipend and struggling for cash or want a more comfortable retirement life with your family, why not use something you already have and take some equity tied in your house?
Equity release, which is authorised and regulated by the Financial Conduct Authority, provide you the ability to unlock nontaxable cash from the value of your property. Moreover, for many, the fact that you do not have to repay the money you release during your lifetime is part of the appeal.
Nevertheless, with the number of benefits of equity release, you still have to pay some charges tied to your equity release plans.
Typically, the cost of equity release is dependent on two factors:
- The initial pay for arranging and put the plan in action
- The interest price charged on the loan
It would be at most health if not to forget that you repay the loan and the equity release interest when you are already in retirement with your family and has no income, pass away or move into long-term care.
Now let’s look into these factors in turn:
The Application Fees
As per the Equity Release Council, the
average cost of planning equity release is between £2,000 to £3,500 and entails
of the following expenses:
- Financial advices dues
- Lender’s costs
- Property appraisal fee or insurance for arranging a lifetime mortgage.
- Professional’s wage
#1. The Financial Advice Fees
To take out an equity release or home reversion plans, you must get reliable financial advice. However, the costs for this can differ dramatically.
The advice process comprises a deep dive into the equity release market, that provides you with proper equity release advice and finally processing your application.
With a reliable equity release firm, this can cost you from £900 to about £2000.
#2. The Plan Contributor’s Costs
Like how other mortgages schemes work, equity release plan team may charge you an application fee or insurance to settle their set-up and lawful expenses while they help you plan for a lifetime mortgage.
These costs can vary from about £100 to £995, and you can opt to either pay it from your equity release capital or combine it to your loan. However, if you conclude to combine it up to your credit, it’s important to remember that it will affect and accrue long compound interest.
The good news is that with so much healthy duel, most equity release team currently have exceptional offers, where there are no or reduced application expenses.
For more information on this and more, you can use our calculator to see how much equity you can release and contact with an master at no cost.
#3. The Inspection/Property Valuation Fees
Property appraisal fee or insurance will be on the charging rooster. Your plan provider needs an independent evaluation and property valuation for two reasons:
First, it’s to have a current market value for your estate (based on the current sale price of a house), so that he/she can know how much you can borrow.
Secondly, to ensure that your estate is in pristine condition for your family. If it’sn’t, then the plan provider is obliged to decline, or insist that you have essential repairs carried out, either pre or post-plan completion.
Surveyor valuation costs affect and are dependent on the estimated value of the property for arranging a lifetime mortgage that needs to be paid off. However, you can find lenders who can offer you a valuation. It all depends on your initial agreement with your plan provider.
#4. The Professional’s Fees
According to the Equity Release Council (ERC), your solicitor must be independent to your plan sponsor’s solicitor, and you must have at least one face-to-face meeting with him/her.
The professional’s fee or insurance is dependent on your choice, and their costs can vary from £600+VAT (plus disbursements) to about £1000.
Some solicitors can even come for a house visit for your meeting, or ask you to show up at any of their local offices, whichever suits you best for the most convenient service.
How Does Interest Charges Work?
Since 2015 until today, the interest rate on equity release have been generally higher than standard mortgage expense. They are between 3.5% and 7% – and that could be the agreed value for the life of your loan.
The amounts of interest you pay at the end of your equity release plan, however, affects and depends on how lengthy the scheme runs and the type you choose. It’s important to remember that this will come to an end when you are ready to sell your property, you loose your life or move into permanent care.
With a limited lifetime mortgage for example, since you do not make any monthly repayments as the scheme goes on, affecting the lending rate that can result to it mounting up quickly. Each year the interest due is added to the overall loan, and from then on, it accrues more interest.
For example, if you have a set interest value of 6%, an equity release loan will grow twice the size after roughly 12 years. At 5% it can take about 14 years to duplicate.
It’s therefore vital to be mindful to sign up for a plan with a “no negative equity” guarantee since it will ensure that what you or your family owe the lender can never exceed the value of your property to help in a more comfortable retirement though has no cash flow.
Moreover, by taking out equity from your lifetime mortgage in instalments, via a drawdown plan rather than as an initial lump sum, you can lower the amount of interest you will pay in the future.
Various equity release companies offer multiple dues, so it’s up to you to ensure that you get the best deal.
For example, Aviva offers allotted price of up to 3.75% interest ratio, More2Life offers up to 3.40% predetermined toll, LV offers up to 6.04% ratio and Legal & General offer a set ratio of 3.40%.
You need to examine the entire package not the valuation before deciding on which is best for you.
Got Questions? Check These First
How Much Does Equity Release Cost?
It all depends on the plan provider you choose. Typically, though, the cost of equity release plans are dependent on two factors:
- The initial payment for organizing and putting the plan in action. These include expenses like: financial advice fees, lender’s costs, property appraisal fees, legal fees. These typically range from £900 to about £2000.
- The interest costs charged on the loan amount
Can I Pay Back Equity Release?
This depends on the plan. Make sure you discuss this with your advisor before you take out a plan.
You don’t have to pay rent to your equity release provider. For lifetime mortgages, you may be able to choose whether to pay back interest or let it build up.
The lease is usually only paid back when you pass away or move into care.
What's The Going Rate For Home Equity Loans?
As of 2nd July 2020, the average home equity loan rate is 5.18%
|Loan Type||Average Rate||Average Rate Range|
|Home Equity Loan||5.28%||3.50% – 9.25%|
|10-year Fixed Home Equity Loan||5.66%||3.25% – 9.25%|
|15-year Fixed Home Equity Loan||5.88%||3.25% – 9.25%|
|HELOC||4.71%||1.74% – 7.24%|
The rates above are calculated using a loan amount of £26,583, with a FICO score of 700 and a combined loan-to-value ratio (LV) of 80%.
With all said, it’s essential that before you embark on the journey to taking out equity on your house, you get independent advice. A financial adviser will talk you through the specifics – including how much equity release will cost you – so you can figure whether it’s the right option for you.
Go to our website, Facebook and Twitter Page or use our equity loan calculator to identify lump sum or initial down plan and weigh with other deals for a healthy gain. Read our terms and conditions.