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Equity Release Interest Rates – What Are They? Guide, FAQs & More

equity release interest rate

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

What are the current equity release interest rates? And what is the total cost of equity release? In today’s guide, we’ll be looking at how interest rates are applied to lifetime mortgages and what this does to the total debt owed. 

If you want to know about equity release and interest rates, you’ve come to the right place! 

Equity release explained 

Equity release is a way for senior homeowners to release equity from their home as a tax-free cash lump sum or a drawdown facility. No repayments are required on the equity until the home is sold, which occurs after death (through your estate) or through the sale of the property after moving into long-term care. You continue to live at the property without paying rent and without the threat of eviction. 

To be eligible for these schemes, the property you want to release equity from must be your main residence with no existing mortgage (or a very small one). You also need to meet minimum age requirements, which are usually set between 55 and 65 years old. If you want to apply as joint homeowners, the youngest person must meet the minimum age requirement. 

There are different types of equity release schemes, but you should only consider those from lenders that are authorised and regulated by the Financial Conduct Authority and are members of the Equity Release Council. 

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Lifetime mortgage vs home reversion scheme

There are two main types of equity release plans in the UK:

  1. Lifetime mortgages
  2. Home reversion schemes

A lifetime mortgage provides a lump sum amount or a drawdown facility (i.e. drawdown lifetime mortgage) with a fixed interest rate. You can choose to pay off the interest or let it roll up to increase the total debt owed when the property needs to be sold. Lifetime mortgages from lenders that are members of the Equity Release Council include a negative equity guarantee, which states you will never need to repay more than the total sale value of your home. 

A home reversion scheme is different to a lifetime mortgage and the less common option. The lender will provide you with a lump sum loan or drawdown facility in exchange for a percentage of your property – and therefore a percentage of its future sale value. The lender does not include an equity release interest rate, but they offer much smaller loans than the percentage of the property is worth. For example, you may be offered £40,000 for 50% of a £200,000 property.

Benefits of releasing equity

The key benefits of a standard equity release scheme are:

  1. Although they may not feel like it because no monthly repayments are due, these are loans. Because they are loans, the money you receive is 100% tax-free
  2. The money you receive can be used for any purpose.
  3. You continue to live in your home and do not need to pay the equity release provider any rent, and you cannot be forced out.
  4. The negative equity guarantee on a lifetime mortgage stops you from ever owing more than the home’s eventual sale value. This ensures your savings are separate and are gifted to beneficiaries of your estate. 
  5. You can ‘ring fence’ some for your property’s value for beneficiaries too. 
  6. Sometimes, releasing equity can mitigate inheritance tax but it’s a risky strategy. 

What is the downside to equity release?

The main downside to using an equity release plan is the total cost of doing so when it comes to selling your property, which has a direct effect on the amount of inheritance you will pass on to beneficiaries of your estate.

The reason the cost of equity release is high is due to the risk the lender is taking. Of course, the lender is aiming to make a profit on the loan as all lenders do. But they’re also safeguarding themselves against changes in the property market and your property value declining over time. 

How much does equity release cost?

The cost of equity release can be significant

With a lifetime mortgage, a standard interest rate that rolls up for over a decade can more than double the amount you owe. This would mean releasing equity equating to 50% of your home’s current value could result in all of your home’s sale proceeds going to the lender when it is eventually sold. Remember, you can never owe more than what your property sells for. 

The cost of a home reversion plan can be just as high – if not higher. Most lenders will ask you to give up a large amount of equity for less than half of its worth. If your property increases in value until it is eventually sold, these costs become even bigger. 

Along with these fundamental costs of equity release, there may be financial services fees to get advice before making a decision, solicitor and legal fees, and early repayment charges if you try to exit your equity release plan early. 

Can you pay interest on equity release?

If you have a lifetime mortgage and want to reduce the total debt that will be taken from your property value in the future, you can usually choose to make voluntary interest rate payments. 

Instead of letting the interest accumulate on the debt each month, you may decide to make monthly interest rate payments to keep the debt down. In doing so, the total debt owed when it comes to selling the property will be lower, leaving more inheritance for your estate’s beneficiaries. You may want to get financial advice before deciding whether or not to make equity release interest payments. 

What is the current interest rate for equity release?

A standard interest rate on a lifetime mortgage is between 4-8% depending on the time when you apply. Most of the time, this interest rate is fixed and does not change for the lifetime of your equity release scheme, but some may offer variable rates instead, which go up and down due to external factors. 

The rate you are offered will depend on the lender you use and the projections for your property. If the lenders project that your home’s value is more likely to decrease than other properties, you’ll be offered higher interest rates. It is not based on your credit score or financial circumstances because no regular repayments are due. 

What are the best equity release interest rates?

The best equity release interest rates are at the lower edge of the average rates between 4-8%. If you can secure a rate close to 4% at the time of writing, this is likely to be one of the very best equity release interest rates on the market. This is, of course, subject to change over time. 

However, even securing a lifetime mortgage with one of the lowest interest rates can be costly if the mortgage is active for around a decade or more. As mentioned above, it could even double the total debt. 

Lifetime mortgage calculators

An equity release calculator will help you understand the cost of these mortgages and how the mortgage interest will be applied (compounding). It will project your total debt over ‘X’ number of years. You can find an equity release calculator on the websites of lenders that offer these types of mortgages. 

What affects the interest rate charged?

There are a number of complex factors that can influence equity release interest rates, not limited to the condition of your property, property market projections, your health and lifestyle (enhanced lifetime mortgages) and the economy. 

What is the catch with equity release?

There is no catch when releasing equity as long as you understand the scheme you are getting into. To ensure this is the case, always get independent financial advice from an equity release expert. 

Others may argue that the cost of equity release schemes and the mortgage interest charged is the “catch”. 

FREE equity release information guides!

This is just one of over 100 new equity release guides on MoneyNerd. We have written lots of new content all about equity release, providing clear answers to some of the most asked questions on this topic. Check out our other equity release guides to learn more and help you make an informed decision.