Lifetime Mortgage Interest Rates & Fees Explained
I think you’ll agree with me when I say…
Well, with popularity comes endless changes and countless providers, thus stressing the need for you to get acquainted with the mortgage rates, fees and costs.
That said, you need to have in-depth research on these and also seek professional advice. Lucky for you, this comprehensive guide will help you navigate the world of lifetime mortgage interest rates while also allowing you to save on time and money that you would have otherwise spent on consultations.
Interest Rates & Fees Explained
Lifetime mortgages1 are the most popular ways of unlocking tax exempt cash from the value of your estate. Moreover, for many, the fact that you are not obliged to repay the amount borrowed during your lifetime is part of the appeal.
Nevertheless, there are still costs attached to these lifetime mortgage plans, including initial fee and interest rates2 – therefore, it’s well worth being in the know about what to expect.
1. Initial Charges
These are usually dependent on your provider. Before you decide on the which you will take, the government recommends that you get advice from an independent financial adviser so that they can professionally talk you through your options.
Typically, you will have to pay for the advice you get from your equity release adviser, plus other additional costs like the provider’s arrangement or application fee, the solicitor’s fee3 for conveyance, and property valuation/surveyor pay.
Generally, these can cost you about £1,500 to £3,500. However, with the right arrangement, you can get a cheaper plan.
2. The Interest Rates
In addition to the set-up charge, you’ll also have to consider the interest rates.
As of 2018, the rates on lifetime mortgage plans were between 5% and 6%. However, since the beginning of 2019, it increased to about 7% – and this can be fixed for the life of your loan.
The amount your interest that builds up to at the end of your program depends on the period it runs (remember that it will come to an end when you sell your estate, when you breathe your last or choose to move into long-term care and the type of lifetime mortgage scheme you choose).
For instance, if you decide to take the interest-only lifetime mortgage which offers you tax exempt cash in a single lump sum, the interest on this scheme will ‘roll-up’ or compound monthly or annually depending on the program you opt for.
Therefore, the amount you will eventually owe your provider will be a sum of the accumulated ‘rolled-up’ interest plus the amount you borrowed.
Rolled-Up/Compound Interest’ Explained
It may sound like a financial jargon, but it’s straightforward.
Basically, at the end of the first 30 days or first years, the amount of interest will roll up and will be added to the initial loan.
The following month or years, the interest will then be ‘compounded’ – it will be calculated based on the sum of the initial amount you released.
So, although the interest rate can remain fixed, the amount you will owe your lender will be calculated monthly or years based on the maximum amount.
The table below shows a clear example of the ‘rolled-up’ interest over the years – built on an annually compounded lifetime mortgage scheme of £60,000 with an interest rate of 6%.
|Year||Loan Amount||Interest at 6%||Total Amount You Will Owe Your Provider|
Source: Equity Release Council
3. The Survey/Property Valuation
Your provider needs to do its own survey 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 they can calculate how much you can borrow.
Secondly, your estate must be in pristine 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 completion.
Surveyor are dependent on the estimated value of the property.4 However, you can find lenders who can offer you a free rating. Make an agreement with your provider.
4. The Solicitors
According to the Equity Release Council (ERC5 ), your solicitor must be independent to your provider’s and you must have at least one face-to-face meeting.
This is your choice, and they can be from £600+VAT (plus disbursements) to about £1000.
Some can even come for a home 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.
Lifetime mortgages come in handy when you are looking to get financial liberty and keep owning 100% of your property. They have a few issues, but in the long-run they allow you to enjoy your retirement, and with the newly structured plans, they give you peace of mind when it comes to leaving an inheritance for your heirs.
How much money could you release?
A lifetime mortgage plan 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.