Making big financial decisions can be a scary thing, especially when it comes to your home. If you are over the age of 55, you may have already thought about an Equity Release. Like with anything else, the most important thing is to be informed. This article will help explain how you can benefit with an equity release mortgage.
How Does an Equity Release Work?
As mentioned before, an equity release mortgage is only available to people who are at least 55 years of age, though there is no maximum. It can be used to “release” money from property that you own provided that it is worth at least £70,000.
Most borrowers will find that they can get between 20 to 50 percent of their property value, depending on a few different factors. The money can be made available all at once in a lump sum, over a set period of time in installments, or can be drawn from on an as-needed basis.
Whichever you decide, interest rates are fixed to whenever the contract is signed. This is incredibly important for stability, because that means your interest rate won’t change through the lifetime of the loan. With a variable interest loan, this results in fluctuating payments that could catch someone off-guard and unprepared.
At least, that would be the case with most loans. Remember, most equity release plans are paid back only when the property is sold. That means no monthly payments, which in turn means no risk of repossession because you can’t miss a payment.
While that sounds attractive due to not having to start paying right away, there is a big caveat. Those kinds of equity release mortgages come with compounding interest. Although your interest rate doesn’t change because it is fixed, the amount you owe in interest will be added to the loan. After that, further interest charges will be calculated on the new amount continually. The interest “compounds” on top of itself, which can quickly grow to very large amounts. Under estimations, you will end up owing double the original loan amount after around 14 years.
Something to note is that you can choose to pay just the interest charges to avoid the debt from growing like that. Another thing to remember is that all equity release providers approved by the Equity Release Council have a “no negative equity guarantee.” That means that borrowers and their heirs can’t owe more than the total value of their home when it is sold. Because of that, it protects people if their property is suddenly worth less than expected due to a downturn in the market.
To recap, an Equity Release Mortgage is unlike most loans because it is independent of how much you make. Instead, it is based on the value of the property, how old the homeowner is, and how healthy they are. There are many places online that can help you calculate how much you could possibly borrow. However, they cannot be taken as an exact indicator to how much you will get in the end.
Reasons to Choose an Equity Release
Because an equity release mortgage can give you access to a lump sum without having to make payments right away, there are several reasons why people use them. The money can pay off a high interest debt that you owe. It can also come in handy if you need to make improvements to your home suddenly. Some people even put the cash towards new property. You’ll be able to do these things without using your other finances, such as your pension.
Important Things to Consider
A lot of this might seem too good to be true. Indeed, equity release mortgages do carry a negative reputation from leaving heirs with huge bills that they can’t pay. Thankfully, reforms from the FCA and the aforementioned ERC have done away with many of the bad practices that have plagued borrowers. However, there are still several things to think about before you sign your name on the dotted line.
The most obvious thing you have to think about is inheritance. Once the loan is paid out from the sale of the property, how much is left for your heirs? Thanks to no negative equity, they will never have to dip into their own pockets to pay for the loan. Still, you should think about how much will be left for them.
Taking out an equity release could also affect your benefits, like long term care support. This is where things get fairly complicated to the point where a single article can’t cover every situation. Instead, you should talk to a financial advisor.
Finally, you should be mindful of fees or legal costs. Some banks have free consultations, and others offer a cashback which can be used to pay legal fees. Whatever the case, just remember to shop around and keep track of your notes. Being armed with knowledge is always the biggest weapon when it comes to your finances.
How much does it cost to use equity release?
The cost of equity release is determined by two factors: fees and interest rates. Typically, fees range from £1,500 to £3,000, although this can vary depending on the lender you choose.
Interest rates are another important factor to consider. Interest is compounded and added to the amount you release, increasing over time. It’s worth noting that additional costs such as solicitor’s fees and lender’s fees may also apply, but these are unrelated to the advice provided by Responsible Equity Release.
What are the current interest rates for equity release?
Equity release interest rates, like other mortgage products, have seen recent increases. In October 2023, the average fixed rate was 7.55%, up from the Equity Release Council’s reported average of 5.74% in August 2023.
During the first half of 2023, customers secured an average rate of only 3.71%. As of 2024, the Equity Release Council states that the average interest rate for lifetime mortgages across the UK is slightly above 6%. It’s important to note that individual circumstances can impact interest rates, so consulting with an equity release adviser is recommended to explore the rates available to you. Currently, the best interest rate stands at 5.39% with MER.
