Equity release interest – How much do you pay?
When you're thinking of generating cash from the equity in your home, you’ll probably want to know how much it costs. In this article, we focus specifically on equity release interest and explain how it works, to ensure you're fully informed before you take your next step.
Equity release interest is actually the interest you pay on a lifetime mortgage, the most popular way to release cash from your home. With lifetime mortgage interest rates currently at their lowest ever, now might be the ideal time for you to look at equity release in more detail.
How does equity release interest work?
With a lifetime mortgage, you borrow an agreed sum of money, using your home as security. It's similar to a standard mortgage, except you don't need to make monthly repayments unless you choose to do so.
Instead, the interest rolls up as time passes (known as compound interest); it is added to your original loan and to any interest you've already built up so your loan debt will quickly grow.
When you die or move permanently into long-term care the loan will have to be repaid, including the interest. This is usually achieved by selling your home.
So how much will I pay back with equity release?
The amount you pay back with equity release will depend on the size of your loan, the interest rate, the number of years the loan is in place and whether you make repayments. Some lifetime mortgages allow you to repay a percentage of the loan without penalty, or you can opt to make monthly repayments against the interest, keeping overall costs down.
How does equity release compound interest work?
Compound interest is charged either monthly or annually depending on your chosen lifetime mortgage; here’s how it works:
Monthly interest lifetime mortgages:
- The loan is secured with either a fixed or a capped variable interest rate
- Interest is added to the loan each month plus the interest accrued in previous months
Yearly interest lifetime mortgages
- The loan is secured with either a fixed or capped variable interest rate
- Interest is added to the loan each year plus the interest accrued in previous years
A Simple Example
||6% Interest Rate
|This is the Equity Release Council’s example of how the annual payments on a £50,000 loan with an interest rate of 6% could work
Therefore as you are paying interest on interest accrued, the size of the loan grows more quickly than with a standard mortgage, but more so with the monthly interest equity release plan.
Do keep in mind though that although your equity release loan will be growing, hopefully so will the value of your property and therefore the equity available to you.
What to look for when comparing equity release
If you have started to compare equity release yourself, there are a number of things to consider in addition to the interest rate charged:
- Are you wanting to take the money in one go or do you need a lifetime mortgage that offers a draw down option so you can access the cash as and when you need it?
- Would you like to guarantee that some equity is left for family?
- Would you like the flexibility to lower the final loan by repaying some of the interest on a regular basis or as and when you like?
So your comparison shouldn’t just be about money, it should also be about how the lifetime mortgages works and the flexibility it offers you - which is where a qualified equity release specialist can help.
Can you reduce the amount of interest accumulating on a lifetime mortgage?
If you’re concerned about the interest building up too much, you can choose a lifetime mortgage that allow you to repay some or all of the interest without incurring an early repayment charge. Over half the products offered by members of the Equity Release Council allow you to do this.
Other optional features that can help include:
- Drawdown reserve: This lets you release an initial amount of money and create a reserve account that you can draw down on as and when you need it. You don't owe any interest on the money in your reserve account unless you actually access it, so compound interest accrues more slowly.
- Downsizing protection: If you decide to sell your home and move to a smaller property, this protection lets you repay your loan without having to pay an early repayment charge.
How are equity release interest rates calculated?
Your provider may consider several factors when deciding on the interest rate for your lifetime mortgage. These include:
- How much you want to borrow
- Your credit history
- The lifetime mortgage you select
- The provider's lending criteria
- Your age and marital status
Fixed vs variable equity release interest rates
Interest rates on a lifetime mortgage are currently around 3% up to 5%, Most are fixed for life so you know in advance exactly how much interest will be charged and how it will accumulate.
You can also choose a plan with a variable rate if you prefer. According to Equity Release Council rules, all variable lifetime mortgages must have an upper cap on the rate, so you will have the reassurance of knowing what the highest possible interest rate could be.
Why is equity release interest higher than a standard mortgage?
Equity release interest rates are higher than those of standard mortgages primarily because:
- Your lender doesn't know when they will get their money back, unlike a standard mortgage with a set repayment schedule.
- You don’t have to make any regular or monthly payments at all, so your lender may not have any income from the loan for many years.
- Your lender could be affected if property values fall in the future.
Age Partnership interest rates
It’s very important you seek professional financial advice before deciding whether to release equity from your home. After careful consideration, we have chosen to partner with the award-winning equity release brokers, Age Partnership.
Unlike some advisers who only offer plans from particular lenders, Age Partnership is an equity release specialist who compare interest rates, products and lenders from many UK leading providers to find you the right deal. And right now, they are offering their lowest ever rates when you use our equity release calculator.