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Equity release may be an excellent prospect for your circumstances. It can offer financial relief against one of your existing assets, your home. However, like all financial products, some costs apply to the amount you want to borrow.
This guide will break down how much you can expect equity release to cost if you apply for a plan. Let’s start by recapping the definition of equity release.
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What is Equity Release?
Equity release is a scheme for homeowners to access some funds about the value of their home. The plan involves taking a cash loan in exchange for a percentage of the value of your property.
The scheme helps older homeowners (usually 55 and above) access funds tied into their homes, giving them a lump sum or regular income to boost their finances. Typically, these funds get used for family, retirement, and other expenses.
Naturally, with all financial products, equity release incurs a series of costs to process the funds and pay back interests accrued on loan. That leaves prospective borrowers wondering how much equity release costs.
The following section will break down the expenses.
Breaking Down the Costs of Equity Release
Weighing up decisions on taking out an equity release pends heavily on how much the loan will ultimately cost. A few initial fees are involved, and the interest builds on top of the borrowed amount.
Generally, equity release works because you take out a loan for a percentage of your home. It gets paid back after your house is sold (usually after death or admission to long-term care). A lifetime mortgage is the most common type of equity release, which is the one just described. However, there is another category known as a reversion scheme.
However, they both share the same principles when it comes to fees. The costs of equity release get broken down into two categories, the equity release fees and the interest you’ll pay.
Find more about both below.
Equality Release Fees
Equity release fees are what you’ll pay upfront when taking out the loan. Because the amount potentially borrowed gets pegged against the value of your property, there are more intermediaries involved than a standard loan.
Subsequently, there will be more fees involved for their services. Learn more about the different equity release fees you can expect below.
Advice
Many brokers will charge a fee to research and discover the best equity release for you and offer financial advice on the prospect. Not every brokerage will have the same policy about these costs, and some will charge a percentage fee based on the amount you want to borrow.
However, as the market becomes more competitive with many plans on offer, numerous brokers charge a single, non-fluctuating fee for financial advice. Despite the high cost, financial advice is imperative to ensure you get the best rates for equality release. All the intricacies of applying will get adequately addressed, leaving the applicant with peace of mind.
Flat fees for advice can range from £500-£2000 but can be less or more in some cases.
Lender’s Charges
Once there’s a secured lender, they will charge an application fee to process your requested equity release. This cost will address the set-up and legal aspects of processing the loan.
Again, the competitive market for equity release has made lenders’ charges quite reasonable. Some may not even charge them at all. However, you’re likely to see an application fee that generally won’t exceed £1000.
Surveyor’s Fees
The surveyor’s fees come as the typical mortgage cost and aren’t any different in equity release. The application requires a third-party surveyor to investigate your home, considering the requested amount will be in exchange for a percentage of the property.
The lender needs to know your home’s current value and ensure that it’s in good condition. So how much will the surveyor’s service tack on to the equity release application?
Many lenders will offer a free valuation of your home to be competitive. In contrast, others will charge a surveyor’s fee based on your property’s value. Therefore, there isn’t a set in stone fee to note.
Solicitors’ Fees
Solicitors must speed up the equity release process and finalise the legal details between themselves and the lender. We note that the Equity Release Council (ERC) rules state the solicitor must be independent of the lender and hold ‘at least one face-to-face meeting.’
The solicitors’ fees can vary but usually have pretty competitive rates.
Interest Rates
Interest rates are the numbers tacked onto your equity release and what you’ll pay back for taking out the loan. You won’t have to make monthly repayments like traditional loans if you take out a lifetime mortgage. However, the cash will be subject to roll-up/compound interest.
What is Roll-Up/Compound Interest?
The interest rate assigned to your equity release depends on your personal and financial circumstances, fluctuating higher or lower pending on various factors. That interest rate will stay with the amount for the duration of the lifetime mortgage, charged every month (or year).
The interest compounds the previous month’s balance at the same rate and continues every month or year. We can present how roll-up/compound interest works with tables comparing equity release interest rates.
Comparing Equity Release Interest Rates
The tables below show how roll-up compound/interest applies to a lifetime mortgage, showing how much you owe. Let’s start with a scenario where you have a loan of £50,000 with an annual interest rate of 4%.
| Year | Balance | Interest Accrued (4%) | Amount Owed |
| 1 | £50,000 | £2,000 | £52,000 |
| 2 | £52,000 | £2,080 | £54,080 |
| 3 | £54,080 | £2,163 | £56,243 |
| 4 | £56,243 | £2,250 | £58,493 |
| 5 | £58,493 | £2,340 | £60,833 |
| 10 | £71,166 | £2,847 | £74,013 |
| 15 | £89,830 | £3,593 | £93,423 |
Here’s an example of the same borrowed amount if the annual interest rate was 5%.
| Year | Balance | Interest Accrued (5%) | Amount Owed |
| 1 | £50,000 | £2,500 | £52,500 |
| 2 | £52,500 | £2,625 | £55,125 |
| 3 | £55,125 | £2,756 | £57,881 |
| 4 | £57,881 | £2,894 | £60,775 |
| 5 | £60,775 | £3,039 | £63,814 |
| 10 | £77,640 | £3,882 | £81,522 |
| 15 | £99,091 | £4,955 | £104,046 |
And finally, what if the interest rate was 6% on the same borrowed amount?
| Year | Balance | Interest Accrued (6%) | Amount Owed |
| 1 | £50,000 | £3,000 | £53,000 |
| 2 | £53,000 | £3,180 | £56,180 |
| 3 | £56,180 | £3,371 | £59,551 |
| 4 | £59,551 | £3,573 | £63,124 |
| 5 | £63,124 | £3,787 | £66,911 |
| 10 | £84,475 | £5,069 | £89,544 |
| 15 | £113,048 | £6,783 | £119,831 |
So as you can see from each table, the interest rate applies to the preceding year’s balance rather than the sum of the original loan. It effectively compounds until your house gets sold. The same principles apply if the interest accrues monthly, although the monthly figure would be lower than the annual.
We have a comprehensive overview of the costs involved; prospective borrowers often have questions, given the complex nature of a lifetime mortgage. We’ll start by answering the ‘when’ about equity release fees.
When Do You Pay Equity Release Fees?
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We’ve presented an overview of the fees you’ll have to pay for equity release. However, you may be wondering if you’ll have to pay these all at once.
Not every fee mentioned above gets paid in the upfront application. We’ll outline when you have to pay each component of the equity release fees below.
- Advice – The brokerage’s financial advice fees will most likely be paid upfront. However, some instances allow these to get added or taken out of the loan.
- Lender’s Charges – Lender’s charges usually get paid when your equity release gets approved, and the money has come through.
- Surveyor’s Fees – Surveyor’s fees will get paid upon applying for equity release as it’s an integral part of the process.
- Solicitor’s Fees – Solicitor’s fees usually apply once the process is complete and you’ve received your money.
- Interest – Interest doesn’t get paid until you sell your home, die or move into long-term care. However, the interest on your loan accrues monthly or annually, depending on the plan.
What’s the Total Cost of Equity Release Fees?
Borrows can expect that the costs of equity release can amount to a figure between £1,500 and £3,000. The final figure can vary depending on the plan and the various expenses behind the application process.
Except for interest, all equity release fees get settled when you receive the money from your loan. But many borrowers have become concerned by the prospect of roll-up/compound interest costing more than the house is worth once sold.
While the loan cost cannot exceed the value of your home (it will not go into negative equity), the main concern is that there will be no money left when the house gets sold. That means there could be nothing left for family after you pass.
Prospective borrowers may query whether you can regularly pay the interest on equity release.
Is It Possible to Pay Interest on Equity Release?
Not every lender offers the same plan. But generally, on lifetime mortgages, it is possible to pay interest on equity release.
Paying off interest in monthly instalments or regular increments can reduce the cost of equity release in the long term and allow you to budget better when considering paying back the loan.
The Equity Release Council has recently made it a rule that lenders must offer the option to allow borrowers to pay in towards interest. So if interest is a concern, it’s worth mentioning payment options when researching your equity release plan.
Typically, you’ll find that interest gets paid in monthly instalments in parallel with monthly income.
Do You Pay Tax on Equity Release?
Equity release is not taxed as it is considered a loan rather than a source of income. However, depending on what you do with the money, there may be expenditures for which you can get taxed.
Any money you give to your family in advance of your passing is an example of your equity release funds getting taxed. Should you die within 7-years of transferring some of your money to them, it could be subject to inheritance tax.
If you use the money to engage in financial activities where you gain interest, that money may also be taxable. Your financial advisor will be able to address any concerns you have about taxes when applying for your equity release.
Are There Ways to Reduce the Costs of Equity Release?
Those concerned with the final amount payable of the lifetime mortgage may wonder if there are ways to reduce the costs of equity release. Generally, you’ll find that there aren’t many methods to get down the equity release fees mentioned above.
Some brokers and lenders will offer ‘specials’ like free surveyor’s report or no application fees. That will reduce the application process costs, but what about reducing the cost of the final loan balance?
You can reduce the overall costs of your equity release by:
- Downsizing – Get downsizing protection that safeguards your interests when you sell your home and move.
- Monthly Interest Payments – Opting to pay your accrued interest off monthly.
- Drawdown Reserves – Create a cash pool for your equity release and only get charged interest on how much you take out.
- Repaying the Loan* – Pay off a percentage or all of your loan.
* Lenders will have varying rules about repaying the loan, where some would penalise heavily for doing so. Still, guidelines are now in force to allow at least partial repayment without penalty.
Can I Repay My Equity Release Early?
The Equity Release Council recently implemented a rule to let borrowers pay between 10% and 40% of their loans annually. If paying your equity release back early is a consideration, discuss it with your financial advisor to understand the implications of early payback.
Consider Your Options on Equity Release
Equity release can be a fantastic way to get access to cash against some of the value of your home. However, the costs involved may be more meticulous for some prospective borrowers to understand.
You can leverage the advice of a financial advisor during the initial stages of applying, or many brokers will provide a breakdown of the costs when comparing plans. Ensure you fully comprehend equity release costs before committing to the loan.