The cost of equity release

Understanding the cost of equity release

We understand nobody likes nasty surprises further down the line. Therefore, we want to make sure you’re informed about every step of the process and the cost of equity release.

Below we run through the main elements that contribute to the cost of equity release you should expect when releasing equity to access the wealth tied up in your property. Obviously everyone’s situation is different, meaning that what you pay and what someone else pays in costs will be different.

If you want to get an accurate idea of what the costs of equity release might be, get in touch today. Our expert advisors will be able to run through your situation over a free no-obligation consultation.

What is the cost of releasing equity?

Valuation fee

The lender will send a surveyor to make a valuation of your property. Depending on the location and property type, this could be a full valuation or a short inspection. The fee varies but is often free of charge, as it can be included in your arrangement fee.

Arrangement fee

Similar to a mortgage, the lender may charge a fee for setting up the loan and this will be quoted in your written offer. It will be either a set amount (anything between £500–£1000), or a percentage of the loan value.

It is then payable when the loan is in place. You can pay it separately or it can be added to the total amount borrowed. If it’s added to the loan, you will pay interest on the amount.

Some lenders charge more than others but might also provide benefits that others do not. Your advisor will take all this into account when looking at the right plan for you, ensuring you understand how it impacts the overall cost of equity release.

Solicitor’s fees

Unfortunately, we cannot estimate the exact figure for your solicitor’s fees, but they will contribute to the overall cost of equity release and vary according to the individual.

However, we regularly work with a few reputable and reasonable legal firms with experience in mortgages and Equity Release. This means we would be happy to recommend one you can trust.

Consultation fee

This is the fee charged by your Equity Release broker and will either be a percentage of the loan amount, or a flat fee.

Fees vary between brokers, so it’s advisable to shop around and compare charges, as well as levels of service, to find the best value for your cost of equity release.

The consultation fee is usually charged upon completion of the agreement. Therefore, if you don’t go ahead with the Equity Release plan, you won’t have to pay anything. Many brokers even offer free consultations, which can be really useful and allow you to shop around.

Interest rates

As with any loan or mortgage product, interest will be charged on the amount borrowed. In the case of Equity Release, you can choose not to pay until the loan comes to an end and pay it when the borrower either dies or goes into permanent nursing care, and the property is sold.

Equity Release rates for a wide variety of products are available online and will vary between 5.6%–9%. Most interest rates will be fixed or capped for the life of the loan. They’ll usually be applied on a ‘roll-up’ basis as the term progresses.

When you don’t make repayments, the interest on the loan is simply added to the total amount you owe. This is the “roll-up” part.

Understanding the full cost of equity release will be detailed in the personal illustration of the scheme that your broker will provide. Don’t accept any deal that does not give you a complete breakdown of all the charges.

Early Repayment Charges (ERCs)

It’s important to be aware of potential Early Repayment Charges if you decide to pay off your equity release loan sooner than planned, or if you sell your property (and the loan is repaid) within a certain period. These charges can vary significantly between lenders and products. They are typically a percentage of the amount repaid, and can decrease over time. Your personal illustration will clearly detail any applicable ERCs, so you understand all potential future costs.

Tax Considerations

While the funds you release through equity release are typically received tax-free (as they are a loan, not an income), it’s important to consider any potential tax implications based on how you use the money. For example, if you gift a significant portion to family, this could have Inheritance Tax liabilities if you pass away within a certain period. Similarly, if you invest the money, any interest or returns earned could be subject to income tax or capital gains tax. Always seek professional advice tailored to your personal financial situation and how you plan to use the released funds.

How can you reduce or manage the cost of equity release?

While certain fees are unavoidable, there are strategies and product features that can help you manage or potentially reduce your cost of equity release over time:

• Making Interest Payments: With many modern lifetime mortgages, you have the option to make partial or full monthly interest payments. This significantly reduces the amount of ‘rolled-up’ interest, meaning the loan balance grows much slower, or not at all.
• Making Partial Capital Repayments: Some plans now offer the flexibility to make voluntary lump-sum or regular capital repayments, within certain limits and without incurring early repayment charges. This directly reduces the outstanding loan amount.
• Downsizing Protection: Many plans come with a ‘downsizing protection’ feature. This allows you to repay your equity release loan without incurring Early Repayment Charges (ERCs) if you sell your property and downsize to a smaller, more affordable home that doesn’t meet the lender’s criteria for transferring the mortgage.
• Choosing the Right Product & Lender: An independent advisor will compare various schemes and lenders to find the most suitable plan for your circumstances, potentially securing more favourable rates or terms that lead to a lower cost of equity release. They can also highlight products with attractive incentives like free valuations or waived arrangement fees.
• Considering Drawdown Facilities: If you don’t need a large lump sum upfront, a drawdown lifetime mortgage allows you to release funds as needed. You only pay interest on the money you’ve actually taken, which can significantly reduce the total interest charged over the life of the loan.