I think you’ll agree with me when I say…
There’s a number of things to learn when it comes to how equity release work which is authorised and regulated by the Financial Conduct Authority.1
Lucky for you, here is a comprehensive guide that will help you understand how all the percentages, fees, or insurance and costs work in taking out equity release products.
Understanding Equity Release Costs
If you are property rich but struggling for cash, or just want a more comfortable retirement life with your family, why not use something you already have and take out some of the equity tied up in your home?
Equity release2 might seem like a good option if you want some extra money and don’t want to move house.
Another good reason to do this is that your money is better off invested in your home (where it is likely to grow) than a cash bank account. Yet another is that having lots of money in your account may reduce the benefits you are entitled to, including help with the cost of care.
If you release equity from your home, you might not be able to rely on your property for money you need later in your retirement.
The money you receive from equity release might affect your entitlement to state benefits.
How you choose to spend your cash is up to you, but equity release products are often used to help supplement a pension, to buy a new car, make home improvements, or to refit a home to charges in mobility or to go on holiday.
Equity release products, which is authorized and regulated by the Financial Conduct Authority, provides 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.
Equity release is a way to unlock cash trapped in your property, tax-free while remaining in your own home. It is for property owners aged at least 55 and over and it has two forms: Lifetime Mortgages and Home Reversion Plans.3
Equity release refers to a range of products letting you access the equity (cash) tied up in your home if you are over the age of 55, generally, the older you are when you take out the scheme, the more money you’ll get. You can take the money you release as a lump sum or, in several smaller amounts or as a combination of both, the advantage of being able to take money out in smaller amounts is you only pay the interest on the amount you’ve withdrawn.
Another option is a home reversion, you sell a part of your home to a home reversion provider in return for a lump sum or regular payments. You normally get between 20% and 60% of the market value of your home (or the part you sell). You will receive far less money than you would from selling the property on the open market, although pf course in that situation you would still have to find somewhere else to live.
When considering a home reversion, you should check the minimum age at which you can take out a home reversion. Some home reversion providers insist you’re at least 60 or 65 before you can apply.
Home reversion plans will usually not give you anything near to the true market value of your home when compared to selling your property on the open market, although you can move home and take your lifetime mortgage with you if you decide you want to downsize later on you might not have enough equity in your home to do this.
Nevertheless, with the number of benefits of equity release products, you still have to pay some charges tied to your equity release products.
An independent financial advisor4 will recommend which they believe is the best equity release company for your.
Typically, the cost of equity release is dependent on two factors:
- The initial payment for arranging and putting the plan in action
- The interest costs charged on the debt
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 advice company
- Lender’s costs
- Property appraisal fee or insurance for arranging a lifetime mortgage
- Professional’s costs
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 vary.
The advice process comprises a deep dive into the equity release market, which ensures proper 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 Fees
Like how other mortgages schemes work, an equity release provider may charge you an application fee or insurance for their set-up expenses when applying 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 into your loan. However, if you decide to add it into your credit, it is important to remember that it will affect and accrue compound interest.
For more information on this and more, you can tap here to see how much equity you can release and contact with an adviser at no cost.
3. The Inspection/Property Valuation Fees
A property appraisal fee or valuation will also be charged for. Your 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 home), so that he/she can know how much you can borrow.
Secondly, to ensure that your estate is in good condition. If it isn’t, then the provider is obliged to decline, or insist that you have essential repairs carried out, either pre- or post-plan completion.
4. The Professional’s Fees
According to the Equity Release Council (ERC), your solicitor5 must be independent to your provider, 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.
How Does Interest Charges Work?
Since 2015 until today, the interest rate on equity release has 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 debt.
The amounts of interest you pay at the end of your equity release, however, depends on how long the scheme runs and the type you choose. It is important to remember that this will come to an end when you are ready to sell your property or move into permanent care.
With a limited lifetime mortgage for example, because you do not make any monthly repayments as the scheme goes on, affecting the lending rate results in it mounting up quickly. Each year the interest due is added to the overall loan, and from then on, it accrues more interest. This means the debt can increase quite quickly over a period of time.
For example, if you have a set interest value of 6%, an equity release debt will grow twice the size after roughly 12 years. At 5% it can take about 14 years to duplicate.
Find the best interest rate for your circumstances and credit history, and find the best deal if so.
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.
Moreover, by taking out equity from your lifetime mortgage in installments, via a draw-down rather than as an initial lump sum, you can lower the amount of interest you will pay in the future.
If you take out a lifetime mortgage you will normally be charged a higher rate of interest than you would on an ordinary mortgage and your debt can grow quickly if the interest is rolled up.
Lifetime mortgages are designed as a long-term arrangement with repayment made on the sale of the borrower’s home when they die or move into long term care. Some lenders will waive the early repayment charge for those who settle their lifetime mortgage due to moving home. Some lenders will allow the lifetime mortgage to be repaid when the first borrower dies if the remaining borrower wishes to move home and redeem the lifetime mortgage.
If you have a home reversion plan, then you can choose to buy back your property or a share in this but will need to pay full market value for it.
Various plan providers offer multiple options, so it’s up to you to ensure that you get the best deal. Speak yo an adviser and find out more.
You need to examine the entire package not just the valuation before deciding on which is best for you.
When releasing equity, it’s tempting to focus on the immediate boost you will get from the money you unlock, but you need to look at how it will affect your future choices and financial situation in later life.
With all said, it’s essential that before you embark on the journey to taking out equity in your home, you get independent advice. A financial adviser will talk you through the specifics – including how much equity release will cost you – so you can find whether it’s the right option for you.
How much money could you release?
An equity release allows you to access the value of your home, tax-free without having to sell up, so that you can have money to spend on whatever you want or need.