Equity Release Costs | April 2024
This article focuses on equity release costs and related topics.
What is equity release?
Equity release is a financial product that allows homeowners aged over 55 to borrow money from their home and receive tax-free cash.
Equity release is a way of borrowing against the capital in your home without having to move out. These schemes are also known as lifetime mortgages or home reversion plans. The various types of equity release schemes allow you to take an income from your home, but will still stay in the property when you die.
You can use an equity release calculator to see how much money you could borrow.
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How much does equity release cost?
The costs of equity release are based on the interest rate on what you borrow and fees charged by the company.
You can find equity release providers in the UK offering a range of products and prices, but they all work within these similar principles. There are two main types of costs to be aware of:
Up-front fees – You must pay one or more up-front fees before you receive any money from your home. These may include arrangement fees, legal fees and survey fees, which will vary depending on the provider and product chosen.
Lifetime mortgage costs – A monthly fee is also payable with a lifetime mortgage. This changes with each provider so it’s important to shop around for an affordable rate.
Different types of costs involved with equity release
Below we have broken down the fees that you can expect to pay.
What fees will you pay?
When it comes to calculating the cost of equity release, you’ll have to budget for these three main services:
- Surveyors’ valuations
- Solicitors’ costs
- Lender’s application.
Here, we walk you through what these services involve. These are all parts of the procedure you’ll go through when taking out a mortgage.
The different types of equity release costs you are looking for include:
Up-front fees
These are one-off, non-refundable costs that you must pay before you can receive your money. They may include arrangement fees, legal fees and survey fees. An equity release scheme is a notoriously complicated product that is not suitable for everyone.
The cost of the equity release provider’s service should never be more than 2% of the loan amount plus any upfront costs (e.g. £2,000 on a £100,000 home). You should also check to see what proportion of this fee is paid to the financial advisor who recommends the product to you.
Legal or solicitors Fees
To accept the offer and proceed, you’ll need to instruct a solicitor. They’ll handle all of the legal work on your behalf and ensure that everything is completed properly until your money is released.
We usually advise that your case be handled by a solicitor that is an expert in equity release transactions. For their service, you’ll generally pay around £1,250, but this is dependent on their criteria, as they can be between £500 and £3,000. Whatever the ultimate amount is, it must be included in the set-up costs of the equity release plan.
Fees for this service can vary greatly depending on how complicated your situation is, which firm you use and where you live (the fees charged by London solicitors tend to be higher than elsewhere in the UK). It’s important that you shop around for an affordable price
Your solicitor should be able to provide you with a good indication of what you can expect to pay in legal costs throughout your equity release arrangement, but always make sure you get everything explained fully before signing any documents at this stage.
There are some equity release products that don’t require legal assistance. However, even if you do use a solicitor for equity release they will likely charge less than if you were taking out any other type of loan
As long as the solicitor charges reasonable fees and does not inflate them because you’ve opted to take out an equity release plan, both types of products should provide similar levels of protection for your family.
Administration Fees / application fee
The lender may charge you an “application” or “administration” fee, similar to a conventional mortgage.
These cover set-up and legal expenses in most cases. The lender determines the cost of these, but they are generally between £0 and £695, dependent on the plan recommended to you.
Survey Fees / Surveyors valuation
You’ll be required to pay for a survey (subject to plan conditions). This is one of the major costs of equity release you’ll have to cover ahead of time.
The surveyor will value your property and send their report to the lender.
You’ll generally be able to rely on a market valuation as your house will be valued by an independent RICS. Following a good appraisal and taking into account other circumstances such as your age, health, and lifestyle, you’ll be given an offer. It’s then up to you whether you want to accept the offer.
This is an independent valuation of your home, to ensure the correct equity release plan is recommended to you. This is usually around £125 – £300.
When considering whether to go ahead with an equity release mortgage it’s important that you receive an accurate valuation of your home. A fee for this will be payable, which can vary depending on the provider. If you are using an approved intermediary they should offer their own in-house valuers who may not charge you any additional fees for this service.
"These are one-off, non refundable costs that you must pay before you can receive your money. They may include arrangement fees, legal fees and survey fees. An equity release scheme is a notoriously complicated product that is not suitable for everyone"
Arrangement Fee
There are lots of different types of arrangement fees that you might be charged when taking out an equity release scheme. The average for this type of product is £5,000 but it can vary from provider to provider so always check before making any decisions.
Lender’s Valuation Fee
At the start of the loan period, this is likely to be around £250 – £500 but may vary between providers. At any time during your equity release plan you might have to pay another fee – if your lender carries out another valuation on your property, this could cost
Discharge Fee
These fees are payable when you repay your loan or move out of your home. They range from £500 to £3,000 but it depends on the provider. If you die before repaying all of the money, the remaining debt will still have to be repaid so factor in any discharge costs when deciding how much money to take from your home.
For peace of mind, it is worth remembering that all equity release lenders will be regulated by the Financial Conduct Authority and the Equity Release Council.
Providers’ ongoing fees
These might be called ongoing administration fees or ongoing valuation fees. These ongoing charges will usually change with each provider but they could cost anything from £75 – £200 per year. This covers the lender’s fee for carrying out another valuation of your property during the loan period, preparing your statement at the end of the plan and sending it to you, plus ongoing legal fees or disbursements.
The ongoing administration fee for equity release
This is the ongoing cost of administering your loan – it might also include surveyors’ valuation fees if required during the life of the loan. This fee will change depending on which provider you use – some charge nothing at all while others have an annual fee that’s added to your mortgage repayments.
Also, when thinking of providers it is worth remembering that if you do also have a potential early repayment charge if you end your mortgage early.
Equity release advice
This is the fee charged by your Equity Release adviser, and will either be a percentage of the loan amount, or a simple flat fee.
Fees vary between brokers, so it’s a good idea to shop around and compare costs, as well as levels of service. The consultation fee is usually charged after the agreement has been completed, so you won’t be charged anything if you don’t follow through with the Equity Release plan.
You will often be able to get equity release advice at no cost, as the fee is actually paid by the provider with who you take out the equity release mortgage. Therefore, you are not likely to have an explicit advice fee.
The key thing is to speak to a specialist equity release advisor and not just get standard financial advice from a financial adviser.
If however, you do find an adviser that wants to charge a fee, then try and do this on a fixed fee basis.
The latest equity release interest rates as at 1 April 2024
The table below shows you the latest rates, as at 1 April 2024, for lifetime mortgages from some of the leading equity release providers in the UK.
| Product | Provider | Interest Rate | Incentives |
|---|---|---|---|
| 5.26% | |||
| 5.31% | |||
| 5.46% | |||
| 5.58% | |||
| 5.60% | |||
| 5.60% | |||
| 5.61% | |||
| 5.61% | |||
| 5.63% | |||
| 5.65% |
Do I pay tax on equity release?
Many homeowners are concerned that they’ll end up paying Capital Gains Tax (CGT) when they release the value in their homes. This won’t happen if you’re using your home to fund your retirement
When considering whether or not tax will be payable, it is important to bear in mind that in most cases equity release plans aren’t actually classed as a loan. Instead, they are considered to be an ‘asset withdrawal’ so there shouldn’t be any CGT payable. However, this depends on the circumstances of each individual, so always check with an independent financial adviser before making any decisions
Tax may become payable if you sell the property within 36 months of taking out the plan – although funds can usually also be released from the sale of the property
It’s also important to know that if you do die with an outstanding amount of money left, then you are likely to pay inheritance tax on it. This is currently set at 40% for amounts over £325,000.
For most people, equity release products are considered personal finance and therefore aren’t subject to CGT or inheritance tax. However, this depends on your individual circumstances, so always make sure you get impartial advice before committing yourself.
How does equity release work?
Typically you can borrow up to 50% of the current market value of your home and release it as a tax-free lump sum or regular income. You repay the loan when you die, sell your home or downsize.
You only pay interest on the amount of money borrowed and interest is added to the loan each month. This means that once the initial capital has been repaid, no further costs are incurred until you die, move house or give up ownership of your property (depending on which type of equity release product you choose).
There are several types of equity release schemes:
- Remortgage
- Home Reversion Plan
- Lifetime mortgage
- Rent-to-own, Buy to let or shared ownership
Can you pay the interest on equity release?
Below we discuss the different types of products.
On average, people who have used the Equity Release tend to access an interest rate of between 3% – 5%. But, depending on your circumstances, there are many plans available with rates lower than 3%, but with interest rates likely to rise in the future, these rates will start to increase.
What’s more, the amount you’ll pay in interest instalments over the course of a lifetime mortgage will vary based on how long it lasts (keep in mind that it will come to an end when you sell your house, pass away, or enter permanent care) and on the plan and interest rate you pick.
For example, if you take out a roll-up lifetime mortgage (which offers you tax-free cash in one lump sum), the interest on your loan will be ‘rolled up’ and ‘compounded’ monthly or yearly according to your plan. This implies that the amount you owe to your lifelong mortgage provider increases each year.
What is rolled up compound interest?
In a nutshell, here’s how rolled-up/compound interest works with a roll-up lifetime mortgage works:
- At the end of the first month or first year, the amount of interest charged is added back to the original loan
- The interest will be compounded the next month or year, which means it’ll be determined based on the original loan plus interest charged throughout the first month or year.
- This process continues for every month or year that follows
Even if your interest rate stays the same, the amount you owe to your provider will be updated every month or year based on the larger amount.
Different types of equity release
There are several different types of equity release, each of which has its own unique features and benefits, so there’s bound to be one that suits your financial situation.
Here we look at the main three types: lifetime mortgages, lifetime home reversions plans and lifetime mortgages with capped drawdown facilities.
- lifetime mortgage
- home reversion plan
- drawdown lifetime mortgage
- lifetime mortgage with a capped drawdown facility
- lifetime mortgage interest only
Lifetime mortgage
The most common type of equity release is a lifetime mortgage, where you borrow money from your home’s value – but remember paying back does not affect how much your family would inherit when you die. In fact, this option could even increase their inheritance depending on how much interest is built up over the lifetime of the loan.
This type of lifetime mortgage has no set lifetime and you can usually release as much or as little cash as and when you need it. You do this by taking out a new lifetime mortgage plan with each release, so there’s no limit on how many times you take an equity release during your lifetime. Once the loan is repaid in full, any further value that builds up in your home will be passed on to your chosen beneficiaries
The final amount to repay the lifetime mortgage depends on several factors, such as: current market values; inflation rate; interest rates at time of repayment; length of time for which money is borrowed.
Home Reversion Plan
You might choose a lifetime home reversion plan instead. This option allows you to continue living in the home and, as long as you stay there, you don’t have to make any repayments on the loan. The amount of equity release funds available will depend on your current age and life expectancy
Lifetime mortgages with capped drawdown facilities
With lifetime mortgages with capped drawdown facilities, you can also choose to take out a lifetime mortgage that allows you to withdraw cash from the home (also known as capped drawdown ), but then caps or limits how much interest is built up over time. This means that when it’s all paid off, there’ll still be some equity left in your property for your beneficiaries.
In conclusion
In conclusion, equity release plans offer numerous unique features and benefits that make them good options for anyone considering how to free up some extra money to help them enjoy their later years. As long as you understand the equity release costs, the fees should be manageable.
For most people, equity release products are considered personal finance and therefore aren’t subject to CGT or inheritance tax, but this depends on your individual circumstances, so always make sure you get impartial advice before committing yourself.
Frequently Asked Questions
What is equity release?
Equity release is a financial product that allows homeowners aged over 55 to borrow money from their home and receive tax-free cash.
Equity release is a way of borrowing against the capital in your home without having to move out. These schemes are also known as lifetime mortgages or home reversion plans. The various types of equity release schemes allow you to take an income from your home, but will still stay in the property when you die.
How does equity release work?
Typically you can borrow up to 50% of the current market value of your home and release it as a tax-free lump sum or regular income. You repay the loan when you die, sell your home or downsize.
How much does equity release cost?
The costs of equity release are based on the interest rate on what you borrow and fees charged by the company.
You can find equity release providers in the UK offering a range of products and prices, but they all work within these similar principles.
Providers’ ongoing fees
These might be called ongoing administration fees or ongoing valuation fees. These ongoing charges will usually change with each provider but they could cost anything from £75 – £200 per year. This covers the lender’s fee for carrying out another valuation of your property during the loan period, preparing your statement at the end of the plan and sending it to you, plus ongoing legal fees or disbursements.
