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How Much Does Equity Release Cost? Complete Analysis

How Much Equity Release Cost

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

How much does equity release cost? 

When you take out a lifetime mortgage or other equity release plan, there is the cost of the plan itself, as well as other arrangement costs you may have not considered. This MoneyNerd guide is written to provide insights into the main and hidden costs of equity release. First, let’s recap on the different types of equity release and how they work. 

What is equity release?

Equity release is an umbrella term that refers to two financial products, namely a lifetime mortgage or a home reversion plan. Both products allow senior homeowners to access some of their home equity, either as a lump-sum payment or a drawdown. 

This money is not repaid each month with interest like normal loans and mortgages. Instead, the money is paid back to the lender after the last surviving homeowner dies by forcing the sale of the property and keeping some of the sale proceeds. The only situation when the home must be sold to repay the debt before death is when the homeowner moves out and into long-term care. 

If you are considering an equity release plan, you should look for an equity release financial adviser that is authorised and regulated by the Financial Conduct Authority (you can check this on the Financial Services Register) and preferably an adviser that is a member of the Equity Release Council. 

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Who qualifies for equity release?

To qualify for equity release you must be releasing equity from your main residence as opposed to a rental investment or holiday home. Although, there may be a small number of equity release providers that do allow you to release equity from a second home. The property must exceed a minimum value, usually around £75,000 and it must meet the lender’s requirements (non-flood risk etc.). You should have already cleared your mortgage on the property or have a small mortgage that you plan to pay off with the equity release loan

This is on top of the age requirement. Most equity release plans require the homeowner to be at least 55 years old, while some may require the youngest homeowner to be at least 60 or 65 years old. The longer you wait to use an equity release scheme the better deal you can usually get. 

What is equity release used for?

Because equity release is exclusively available to senior homeowners it is often used as a means to fund retirement and expenses required in later life. For example, it may be used for:

  1. Everyday expenses in retirement to improve the quality of living
  2. Holidays and cruises around the world
  3. Private care services, such as at-home carers for so many hours per week
  4. Private medical costs
  5. Home renovations and improvements, such as making a home more suitable for elderly people (stairlifts etc.)
  6. A combination of the above

Some seniors may release equity to give the money away to family members. There is a trend among equity release users to give the money to children to help them put down a deposit on their first home purchase. 

Lifetime mortgages and home reversion plans

Lifetime mortgages come in a number of variations. A standard lifetime mortgage charges a fixed interest rate on the loan amount. This interest does not need to be paid back each month either. But it does roll up and add to the total debt, meaning the amount you owe grows continually until the loan is repaid in full through the property’s sale.

A home reversion plan works by getting the homeowner to agree to give up a percentage of the property’s future value, rather than charging interest. The homeowner will have to agree to give up a much greater percentage of the future sale proceeds in comparison to the percentage of equity they release, making it a profitable deal for the lender. 

What is the catch with equity release?

Equity release can sound like a sweet deal from afar. You receive tax-free cash and do not have to make repayments until your home is sold, either after death or moving into a care home. But the reality of the situation is not as great. Equity release is exceptionally expensive with most plans costing the homeowner double or even triple the loan they receive by the time it has to be repaid. This might not be an issue if you never go into care and don’t have children, but it does cause a conundrum for those with children who would benefit from a greater inheritance. 

What is the average interest charged on equity release?

At the time of writing and subject to change, the average interest rates on lifetime mortgages in the UK range from 2-10%. The interest charged differs between lenders and is based on your age and your property. Choosing a lifetime mortgage as late as possible and releasing a smaller amount for equity will help you secure a lower interest rate. 

How much do I pay back on equity release?

How much you pay back on equity release depends on the type of equity release product you choose and specific circumstances. 

The percentage of your property’s future sale that you pay back with a home reversion plan is fixed no matter how much time passes. This is not the same as how much you pay back, because fluctuating property prices will determine the exact figure. You may agree to give up half of the property value today, which may be £75,000 of a £150,000 property. But in the future your property could be worth £200,000, meaning, you have to pay back £100,000. 

With a lifetime mortgage, the exact figure you pay back depends on the loan amount, interest rate, and how long until you die or move into care. To give you an example of how expensive they can become, taking out £65,000 with a 6.4% interest rate over 12 years rolls into debt worth nearly £137,000. 

Trying to get out of any equity release plan is extremely expensive due to early repayment costs. 

Use an equity release calculator for help!

The financial advice you must receive before taking out an equity release plan should explain the full costs of a proposed plan. You should also be able to see the full and long-term costs of equity release by using an equity release calculator

How much does it cost to release equity?

Aside from the actual cost to get an equity release plan, there are other costs to consider when setting up the plan and using professional services. 

It is a requirement to get independent financial advice before agreeing to release equity. These services can sometimes be free of charge, but the very best and recommended equity release advice services come at a cost. These paid-for services also help to find you a deal and make an application – just like a mortgage broker would. 

Solicitors or advisers will sometimes charge a fixed fee, but more often than not, they charge a fee that is a percentage of your loan, ranging from 1-3%. So, if you were taking out £50,000 in equity as a lump sum, you may have to pay legal costs from £500 to £1,500 in most cases. This may or may not include an application fee. 

Do you pay tax on equity release?

The money you receive as part of an equity release scheme is not subject to any type of tax. Because there are no repayments, you may feel like you have sold part of your home in advance. But the money is officially a loan and credit you receive from lenders is not subject to tax. 

Can equity release affect inheritance tax?

Equity release can have an effect on the inheritance tax your estate and beneficiaries may owe. In fact, equity release can both increase or mitigate inheritance tax liability. It is best to discuss this when you receive financial advice.  

If you have a short life expectancy and are thinking about using equity release to give money to loved ones, be aware that financial gifts within seven years of your death can still be subject to inheritance tax. 

How much does it cost to release equity (The unseen costs!)

There might be some unseen costs of equity release relating to the money you are no longer entitled to receive. By receiving a large sum of money, your newfound wealth could mean you are no longer eligible to receive some means-tested benefits, including Universal Credit and Pension Credit (not your State Pension!). 

For example, for every £500 you own above £10,000 will reduce your Pension Credit entitlement by £1. If you no longer receive Pension Credits, you might not qualify for a council tax reduction either. 

There may be ways around this issue that your solicitor or adviser can help with. For example, you might decide to use a drawdown equity release plan instead of receiving a lump sum that puts you above the threshold to receive some benefits. 

Can you move home after releasing equity?

The Equity Release Council states that all of its members must allow homeowners to move to a suitable home and take their lifetime mortgage with them. 

For the home to be viewed as suitable, it must be of equal or higher value (unless some of the loan is paid off) and the property must be just as easy to sell on the market. Unique homes may not be seen as just as easy to sell, such as extremely remote homes. 

Still considering a lifetime mortgage?

If you are still considering a lifetime mortgage after discovering the arrangement fee, the true costs of these plans and more, you can learn the finer details about them on MoneyNerd. Check out one of our other equity release guides for further examples, definitions and explanations.