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Cheapest Equity Release Plans – Complete Review

cheapest equity release

For free and impartial money advice and guidance, visit MoneyHelper, to help you make the most of your money.

What is the cheapest equity release plan in the UK? If you have decided to apply for a lifetime mortgage, you’ll probably want to know where the cheapest equity release interest rates can be found. 

Here you can find some useful tips when searching for equity release interest rates in the UK, and some additional pointers when wanting to strike the best deal. Let’s begin with a quick equity release recap! 

Equity release explained

Equity release is a method of borrowing for people over 55 that does not require any monthly repayments. The loan is secured by their home and is only repaid through the money raised from the sale of their home after they die or once they move into care. 

This means the homeowner will not be able to pass on as much wealth or their property to their loved ones as an inheritance. And as such, it is what can make the decision to use equity release a difficult one.

There are two types of equity release products available in the UK. There are lifetime mortgages and home reversion plans, but these are sometimes grouped together as “equity release products” or “equity release mortgages”. 

Only consider any equity release scheme from a lender that is authorised and regulated by the Financial Conduct Authority (FCA). It’s also advised to stick with lenders that are members of the Equity Release Council because you benefit from additional protection, such as the negative equity guarantee. 

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Who qualifies for equity release?

Equity release mortgages are only available to people over the age of 55 who own their own home with no existing debts attached. Some lenders may even apply an upper age restriction on equity release. For example, Nationwide equity release mortgages are only available to people between 55 and 84 years old. 

The property you are releasing equity from must be your main habitual residence because the debt is repaid when you leave the property, either due to moving into long-term care or due to death. 

This is the criteria to apply for an equity release mortgage, but the lender will then assess your property to ensure it has been built correctly to the regulations and does not include hazardous materials. They’ll check other things too, such as flood risks and the percentage of the roof which is flat. If they are unhappy with something they can still reject your equity release mortgage application. 

What is equity release used for?

Equity release can be spent on anything the homeowner wishes. Many homeowners use their equity release plan to fund a higher standard of living throughout retirement, whereas others may use the money for home renovations and holidays. 

A smaller percentage of equity release users take out a lump sum and give most of the money to their children to help them buy a property of their own or start a new business. 

What is the catch with equity release?

The overall cost of equity release is the biggest drawback of using an equity release mortgage. As will be illustrated in the section below, both a lifetime mortgage and a home reversion plan can end up costing more than double the loan amount taken out. 

The consequence of using such an expensive method of borrowing is that your loved ones will receive a significantly smaller inheritance than they otherwise would if no equity release plan was used. And this is why so many people want to find the cheapest equity release interest rates. 

Home reversion plan vs lifetime mortgage

A lifetime mortgage and home reversion plan work as described earlier; they do not require any monthly repayments (unless volunteered by the homeowner) and the debt is repaid upon death or moving into long-term care. Both equity release plans can be accessed as a lump sum loan or as a drawdown loan where it is paid out in instalments.

A lifetime mortgage does charge a fixed interest rate on the loan amount. The interest from each month gets added to the total debt each month – and the interest amount itself grows bigger due to the debt growing bigger all the time. This can make the cost of lifetime mortgages expensive over long periods. For example, someone who takes out a lump sum of £65,000 with a 6.4% interest rate would owe near enough £137,000 after just 12 years of having the mortgage. 

Home reversion plans will not charge any interest on your loan, and this is because the lender guarantees a profit from the loan in another way. To take out a loan this way, the homeowner must agree that the lender can have a fixed percentage of their home’s future sale money. This percentage will be much greater than the percentage of equity released, typically double or more. For example, a 20% equity loan today could cost you half of your property’s sale proceeds in the future. 

What is the best equity release plan?

The best equity release plan is based on personal circumstances and best discussed with a financial adviser who is authorised and regulated by the Financial Conduct Authority. However, lifetime mortgages remain more widely available and are the more common method of equity release in the UK. 

What is the cheapest equity release product?

Both lifetime mortgages and home reversion schemes can be exceptionally expensive over many years. But a lifetime mortgage is cheaper than a home reversion plan in the short term, despite what equity release provider you use and the lifetime mortgage rates you settle on. This is because a lifetime mortgage debt grows steadily over many years, whereas a home reversion debt grows instantly once the credit agreement is signed. 

Over the long term, both a lifetime mortgage and a home reversion plan can be just as expensive as each other. If you do choose a lifetime mortgage, it is best to use a company that is a member of the Equity Release Council. Council members must abide by the negative equity guarantee, which means they will never chase you or your estate for any debt that has exceeded the sale value of your home. 

Which lenders have the cheapest rates?

Most lenders do not publicly advertise their equity release interest rates, so it is difficult to know who has the cheapest equity release products. You’ll need to do your own research to uncover each representative interest rate. 

You may be able to find relevant information on each lender’s equity release calculator on their website.

Where can you get equity release loans?

Equity release loans are available from specific equity release companies that only deal within the equity release industry (e.g. Pure Retirement) as well as household company names that deal with other financial and insurance products, such as Aviva. 

Banks tend to only deal with one type of equity release loan – a lifetime mortgage. However, they rarely advertise their equity release product extensively barring a couple of exceptions. Nationwide Bank does provide plenty of details about their own lifetime mortgage on their website. 

When should you use equity release?

Money maverick Martin Lewis appeared on Good Morning Britain to answer one homeowner’s question if they should use equity release. He said that it can be beneficial if you use it as late as possible and only release as little as you require. 

What is the lowest equity release rate?

The lowest equity release interest rates on the market at the time of writing range from around 2% to 5%. 

The interest rate you are offered may not be exactly as advertised. This is due to the lender taking into account multiple factors before deciding what interest rate they can offer you. They’ll consider the loan amount, your age and details about the property and its projected value. 

Can I get help to find the best equity release deals?

Everyone should receive financial advice before applying for equity release. Some of the independent financial advisers – i.e. not those who work in-house for lenders – can provide additional brokerage services. They will assist you to find the cheapest equity release options for your situation and will even help you source an equity release solicitor and make an application. 

How much does it cost to release equity?

How much does equity release cost? This is a frequently asked question by anyone considering an equity release plan to access a cash lump sum. 

Aside from the cost of the loan itself, there are additional fees and charges you should know about. You will need to pay for the services of a financial adviser and solicitor, and there may be additional arrangement fees to consider. At the very least, the equity release process will cost £2,000 inclusive of VAT – but probably more.

Can I sell my house if I have equity release?

You can sell your home if you have equity release as long as you plan on moving to another property and taking your equity release mortgage with you. If you do not plan on buying another property then you will need to pay off your equity release plan and this will incur early repayment charges. Moreover, if you move to a less valuable home, you might have to pay off a proportion of your equity release mortgage, and this could still trigger some early repayment fee. 

The Equity Release Council states that lenders must allow homeowners to move when appropriate. It may be deemed inappropriate if you are wanting to move to a unique property, such as one that is extremely remote or a boathouse. 

Are equity release loans taxed?

The money you receive as part of the equity release is not subject to any type of tax. You only pay tax on employment income and money you receive through the sale of an asset, called Capital Gains Tax. it may feel like you are gradually selling off your home back to a lender, but equity release is still a loan – and UK loans are tax-free. 

Will equity release stop my pension payments?

Equity release will not stop your basic state pension payments, but your new wealth could make you ineligible to receive some means-tested benefits. Examples of means-tested benefits that could be affected by equity release include Universal Credit, Pension Credits and as a consequence to the latter, Council Tax Reductions. 

What is the alternative to equity release?

There are some alternatives to equity release that should be explored by you and your financial adviser. One of the most popular alternatives is to move to a less valuable property and sell your current home. This would create a small fortune that could be used to fund retirement and increase the quality of later life. 

For more information on equity release and the equity release companies to consider, check out our other free guides! 

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