Skip to main content

What Are The Interest Rates on Equity Release?

    What Are The Interest Rates You'll Need To Pay On Equity Release?

    Equity release is such a popular way to loan money nowadays, especially with its low-interest rates. But what exactly are the costs? We've laid it all out.

    What's Equity Release?

    Equity release is the act of accessing the wealth held up in your home. You can take out a long-term property-based loan (also called a later life loan). You'll only repay it thoroughly once you have passed away or moved into a permanent care facility.

    Tip: Regarding all equity release schemes, you don't need to worry about what will occur to your partner after you're no longer around. The property only gets sold once the last person passes on or goes into long-term care with couples.

    Now:

    Whether you release a lump-sum or smaller instalments (otherwise called a drawdown), the cash you unlock remains tax-free. Why? Because when you release equity, there's no capital gain (which would have to be above the set threshold). After all, you're only borrowing money against your home.

    Tip: In an instance where you invest your money, any interest earned may be subject to tax. So it would help if you were transparent regarding your intentions; you consult an advisor or solicitor.

    Also, majority equity release services will not need you to make any instalments during your lifetime.

    Equity Release Interest Rates

    Looking over the past few years, interest rates on equity release have maintained general highs compared to regular mortgages' interest rates.

    Considering how the equity release rates have plummeted, it's a different calculation now.

    Some rates have hit lows of 2.65%, and you can consider that as an actual value through the life of your financial obligations. 

    Isn't that great?

    Still, the total interest you pay at the end of your equity release scheme will depend on how long it runs and the plan you choose. You remember that this will only end when you're ready to sell your property land or move into permanent care.

    What does this imply for you?

    For instance, regarding a limited lifetime mortgage, because you don't make any monthly repayments through the scheme's precession, the result is usually a mounting interest bill. Every year they add the interest because of the overall loan, and it accrues more interest.

    We commonly know this as 'compound' interest. The interest's growth remains self-perpetuating.

    But listen up:

    Perhaps you have a preset interest ratio of 6%, as it was in the past; your equity release interest bill will double up after about 12 years. But, at the Wonderful current interest rate of around 2.25%, it will take much longer.

    Let me tell you something. 

    You must sign up for a plan with a "no negative equity" guarantee, as it will protect you from owing the lender more than the value of your estate.

    Take out an equity release plan with a drawdown. You may reduce the amount of interest you'll pay in the future somewhat instead of the initial lump sum.

    To simplify

    Taking out a lifetime mortgage will expose you to higher interest rates than a regular mortgage. The amount you owe can also multiply if the interest gets rolled up.

    With that said,

    Lifetime mortgages get organised as long-term arrangements with repayments made upon the borrower's home's sale after they die or move into long-term care.

    Some lenders waive early repayment charges for clients who settle their lifetime mortgage because of a residence change. Other lenders may allow it to get repaid after the first borrower dies. The remaining borrower wishes to shift and restore the lifetime mortgage.

    Better yet:

    When you get a home reversion plan, you may decide to repurchase your estate or some shares in it; paying its full market value. Different plan providers offer various options, and it's your responsibility to ensure you receive the most beneficial deal.

    You must speak to an adviser and find out more.

    Aviva offers an allotted estimate of up to a 3.75% interest ratio, whilst More2Life offers up to a 3.40% predetermined toll. Whereas LV provides up to 6.04% and Legal and General offers a set ratio of 3.40%.

    Before determining which scheme is best, you must examine the entire package, not just the valuation.

    What's Rolled-Up or Compound Interest?

    When you have rolled-up or compound interest on your loan:

    • They add the interest accumulated to your original loan at the end of the first month or year (regarding your plan).
    • At the end of the next month or year, the interest compounds. It gets added to the initial loan and the first-month or year's interest.
    • The interest continues accumulating. It carries on throughout the period of your loan.
    • Although your interest rate remains fixed, the total interest grows with the total of the loan.

    Past & Current Equity Release Interest Rates

    A few years ago, the equity release looked very different because it had a much higher interest rate. It's now a lot cheaper, with some plans at low rates of 2.25%. Let's run some practical numbers to increase clarity.

    Perhaps you released £10,000 at 5.97% in 2015; the amount you'd owe after ten years is £17,857.5, while after 20 years, it would be £31,890. Let's compare this to today's interest ratio: If you take out a scheme at 2.25% in 10 years, you'd only owe £12,492!

    Remember, 

    This assumes you have no monthly repayments.

    PRO TIP: If you have released equity release at a higher interest rate back then, you follow up and see if you're able to switch to a lower interest rate.

    Is This Expensive? A Quick Study. 

    Looking at the current interest rate of 2.25%, you see that it's cheaper than before. Meaning that your property's value will go up by a little 2.25%, and you can still see growth on your property with cash taken out.

    Now:

    As per this article and prediction, "Not to overlook the economic uncertainty fuelled by the pandemic (Covid-19) and Brexit", the UK's property market enjoyed a robust year in 2020. Looking at the average price of houses in London, the UK, and predictions for the capital's property market in 2021.

    According to a Nationwide house price index report, it reached a six-year high of 7.3%. Rising from 6.5% the previous month.

    What does this mean?

    Even if your property only sees 4% growth, your net property value will increase with a 2.25% equity release interest rate. You'll receive:

    • More cash from the equity release to spend as you wish.
    • No repayments. You'd still occupy your home.
    • If property prices grow as expected, you will get more wealth in net property growth.

    How Do I Access the Best Interest Rates on Equity Release?

    Well, typical interest rates on equity release sit at around 5%. The increase in competition within the equity release sector has forced providers to plunge their rates. Currently, it's at a stumbling 2.25% – never has it seen such a low.

    Better yet:

    The rate you get from your equity release company will depend on your age and health, your property's value, and the current conditions on the market.

    Simply,

    To receive the best rates available, use a financial provider that's registered with the Equity Release Council. They remain obliged to inform you whether they'll deliver full or selective market offers.

    Listen here:

    Before consulting with a financial advisor, compare equity release interest rates online. You must make use of one of the many dating websites.

    There's something you should understand:

    When comparing the best equity release rates online, consider the annual percentage rate (APR) rather than the advertised or nominal rate. The fact remains that the APR will include additional fees and costs that the advertised rate will not.

    Is Equity Release Safe?

    Luckily, in recent years, many rules and regulations are keeping you and your finances safe. 

    You don't have to worry about a thing!

    Equity release schemes had an impoverished name back In the late 1980s – early 1990s. It was due to increased corrupt industry practices. Several deceitful lenders undertook expensive deals that caused homeowners (and their properties) to owe them more than their homes' value.

    However, you shouldn't worry!

    These corrupt actions of the lenders caused uncertainty regarding equity release. People weren't so keen on it anymore, resulting in something positive as well. Industry regulations became more strict.

    Simply,

    The Financial Conduct Authority (FCA) helped improve equity release processes because of their regulations and customer protection policies. Equity release is now so much safer than back then. Today, it's an excellent way for someone 55 or older who needs extra cash quickly.

    Now:

    Equity release schemes or plans remain regulated by the Financial Conduct Authority (FCA). Most providers out there are also members of the ERC (Equity Release Council), a trade body with high standards and the best customs and procedures for equity release companies and financial advisors.

    To make sure you're choosing the right plan, the council states that:

    • Rates need to remain fixed, and if not, the provider must have a maximum limit for the loan's lifespan.
    • It allows you to live on your property your entire life or until you need long-term care. It will help if you abode by the rules of your equity release plan.
    • You can move house as long as your lender has approved the new property and that it offers the same amount of security for your equity plan.
    • Lifetime mortgage plans need a 'no negative equity' guarantee. When your property gets sold, and you get less than your loan, you won't have to pay in the balance. Please also take the solicitor's charges and agents' fees into account.
    • The Equity Release Council safeguards you with their strict help on the sales process. They also allow you to take out an equity release plan if you have adequate financial support or advice from independent money advice services.

    In Conclusion

    The interest rates have become so reasonable in recent years that it's such a great way to loan money! Equity release costs are essential to factor in if you're considering equity release to borrow money. It's also relatively easy to figure out if this is for you with the equity release calculator.

    Always ask an expert for advice, and don't forget to do your research, so you end up with the best provider.

    Equity release doesn't have to get complicated and expensive anymore!


    You may also like