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What You Need to Know About Equity Release Interest Rates

Written by, Marija Petkova

Updated April, 20, 2022

If you’re short on cash and over 55, one of your options to take out a lump sum of money is equality release. 

But, what is equality release, what are equity release interest rates, and what can affect them? In this blog post, we’ll look at everything you need to know about it and more. 

Read on!

What is Equity Release?

Equity release is a process that allows you to access the equity tied to your home and take money against the value of your property. You can take the money in instalments or as a lump sum, and sometimes, you can opt for a combination of both.

It can be an attractive option if you are struck by a sudden expense or need to pay off debts, but it’s only available to those over the age of 55

What Is The Interest Rate on Equity Release?

The lowest current equity release interest rates range between around 3.45% (AER) and 7.10% fixed for life. Variable interest rates, on the other hand, start at 3.61% (AER).

According to the Equity Release Council, equity release rates have increased from 3.95% in January 2021 to 4.16% by Jan 2022, while the average borrower got a rate of 3.39% in H2 of 2021. 

These numbers are quite high compared to the average mortgage rate in the UK.

How much does equity release cost? 

In addition to the interest rate, taking out equity release almost always comes with some extra fees. 

Depending on the lender, you might have to pay a solicitor’s fee, application fees, valuation fees, and advice fees that can cost you between £1,500 and £3,000 in total.

The most common fees associated with equity release are:

  • Valuation fees –  A valuation fee is a fee paid to the lender for assessing the value of the property. It is collected at the time of application and is based on the value of the property. The amount of the valuation fee can vary depending on the lender and the type of property.
  • Solicitor fees – Solicitors also charge a fee for their legal advice. The fees can vary depending on the solicitor.

As equity release is a long-term commitment, it’s important to compare rates from different providers to ensure you’re getting the best deal possible. If you’re not sure what the best course of action is, a mortgage broker may prove helpful.

Types of Equity Release

There are two equality release options.

Lifetime mortgages 

A lifetime mortgage allows you to take out a mortgage on your main residence while retaining ownership. 

The main benefit of a lifetime mortgage is that it does not have to be repaid until after you die or move into long-term care (you can let your interest roll up) and you can release some of the equity in your home without having to make any monthly repayments.

Home reversion plans

A home reversion plan is the process of selling one part of your home in order to pay off your mortgage. You can remain living in the property until you die or move into a long-term care facility but you will have to maintain and insure it. 

The equity release costs will depend once the property is sold and the lender will receive the agreed-upon portion of the sale.

What Affects the Interest Rates on Equity Release?

The interest rate on your equity release mainly depends on the type of plan you chose and how long it will run.

Here’s what lenders look at to determine your interest rate: 

  • Requested loan to value – The requested loan to value (LTV) is the ratio of the requested loan amount divided by the property value. For example, if an individual is requesting a £100,000 loan and the property is appraised at £150,000, then the LTV would be 66.7%.
  • Credit history –  The type of products and equity release mortgage rates available could vary depending on the borrower’s credit score.
  • Product Features – Certain perks may increase the price of equity release loans such as inheritance guarantees and a reserve facility.
  • Age – The borrower’s age can affect the loan amount but it doesn’t affect the interest on equity release.
  • Marital Status – Most lenders only work with married couples who apply for equity release jointly. If you take out equity release with your partner, the lender will consider the younger applicant’s age.

How Can You Reduce The Cost of Equity Release?

There are some things you can do to reduce the overall cost of equity release, including: 

  • Downsizing protection – If you get downsizing protection, you could pay off the loan early without having to pay an early repayment fee. This will save you money if you decide to sell your property and move to a smaller one.
  • Interest repayments – Some products and lenders might offer you the option to pay off the full or partial interest repayments based on the current equity release interest rates in the UK.
  • Loan repayments – If you have received a lump sum of money, such as inheritance, while you’re paying off your loan, you can use it to make a partial payment without incurring an early repayment fee. The Equity Release Council has included this feature as a product standard for all plans which means borrowers can repay between 10%-40% of the amount in one payment.
  • Drawdown lifetime mortgage – A drawdown lifetime mortgage is a type of equity release product that allows you to access cash from your property over time.

You can take out a lump sum or smaller amounts of money when you need it, the maximum of which is determined when you take out the mortgage. You pay interest only on the amount that was taken out and not on the amount that was initially approved.

AER vs MER

The annual equivalent rate (AER) is the interest rate added over a year that’s paid as part of a lifetime mortgage where interest rates are compounded. The interest is earned not only on the original loan amount, but also on the interest that has been accrued each month.

The monthly equivalent rate (MER), on the other hand, is the interest rate added over a year but divided over months. 

Fixed vs Variable Interest Rates

If you have a fixed-rate mortgage, your equity release rate will be locked in for the entire loan term. This means that regardless of the changes that happen to the interest rates in the market, your monthly payment will stay the same.

You may be interested in: What Is a Good Mortgage Rate in the UK?

If your mortgage has a variable interest rate, it can change over the course of time, but it can’t go over the set upper limit. In most cases, the variable interest rate is linked to the consumer price index (CPI). This means that as the CPI changes, so do your equity loans interest rates.

Bottom Line

Considering the fact that personal loans in the UK are usually repaid between one and five years, equity release loans in the UK are a great option for people over the age of 55 who need an extra financial boost. If you’re considering taking out equity release, it’s important to shop around and compare your options from various lenders since equity loan rates regularly move up and down.

                           

Frequently Asked Questions And Their Answers

Are interest rates fixed for equity release?

Based on Equity Release Council product standards, lifetime mortgages must have a fixed interest rate. If the mortgage has a variable interest rate, the lender has to set an upper limit for the entire loan term.

Can I sell my house if I have an equity release?

Yes, you can sell your house and use the money to pay off your equity release loan, but before you do, you might want to discuss the decision with your financial advisor and go over the agreement.

What is the best age to take equity release?

The most common age group that takes out equity release are people between the ages of 65 and 74. Both younger and older applicants are unlikely to find an offer from every lender. Your age will affect the loan amount but not the equity release interest rates, which is dependent on the market and the length of the loan.

My name is Marija, and I'm a financial writer at DontDisappointMe. Although finance might not be everyone's cup of tea, my 10+ years of working in one of the biggest banks in my country, and my interest in extensive research on everything finance/investment-related, have made me somewhat of an expert in the field (if I do say so myself). No longer having the passion to work in a corporate setting, I decided that I couldn't let all of this knowledge go to waste so I started writing. And, here I am! Today I try to share my knowledge with my audience in the hopes of making this topic as simple and interesting as possible. In my leisure time, I like spending time with my family and travelling to new locations.