Equity Release Interest Rates

If you are considering Equity Release you may be wondering how it works, if you are borrowing money and if there is an interest rate on the amount you release. Equity Release is a highly regulated market in the UK and there are steps you can take to ensure you get the best deal possible.

When you release equity in your property through a Lifetime Mortgage (the most common type of Equity Release), you are taking a specialist mortgage product. The provider will lend you the money in line with the amount of equity release and a fixed for life interest rate will be applied to the loan.

Let’s explore Equity Release interest rates and how the product works.

Do You Pay Interest on Equity Release?

Yes, on most Equity Release products you have an interest rate applied to the amount you release. There are two types of Equity Release product in the UK:

• Home Reversion Plans
• Lifetime Mortgages

Home Reversion Plans work in a different way to Lifetime Mortgages. With a Home Reversion Plan the Equity Release provider will make you an offer for the equity you want to release. This offer is normally far below the market value and this is how Home Reversion Plan providers make their profit margin.

With Home Reversion Plans, because the provider is purchasing the equity up front there is not normally an interest rate applied to the value. However there may be other fees applied by the provider. A Home Reversion Plan will still allow you to live in your property after you sell a portion of the equity.

Because Home Reversion Plans offer poor value for money, most Equity Release products in the UK are Lifetime Mortgages (over 99% of the Equity Release market). Lifetime Mortgages allow you to borrow the amount equivalent to the value of equity you release and an interest rate is applied to the loan. With a Lifetime Mortgage, you retain 100% ownership of your property.

What is the Interest Rate on Equity Release?

The interest rate you will be charged on your Lifetime Mortgage will vary between lenders and you may find that some providers are more competitive than others. It is important to compare deals across the range of Equity Release lenders to find the best product for your circumstances.

You will also find that the interest rate is affected by your age when you take the Equity Release. With both Lifetime Mortgages and Home Reversion plans you are allowed to remain in your property until you pass away or require long term care.

Interest rates for Lifetime Mortgages range from as low as 5% all the way up to 10%.

What Impacts the Interest Rate on Equity Release?

There are four factors that affect the interest rate you will be offered on an Equity Release product:

Loan-to-Value

The Loan-to-Value (LTV) of the transaction has the most significant impact on the interest rates available with Equity Release. The higher the LTV, the higher the interest rate as a general rule of thumb. This is because the higher the loan relative to the property’s value, the greater the risk of the property falling into negative equity if house prices fall. At this time, the highest available to Equity Release applicants is 50%.

The Lender

All lenders offer lifetime mortgages at different rates of interest. Each lender sets their criteria and interest rates accordingly to attract their target market. Even though all lifetime mortgage lenders target clients aged 55 or over, there are many market segments. For example, AVIVA may offer a more suitable product if the applicant’s property is near to commercial premises. Whereas, Pure Retirement may be more suitable for clients with a private septic tank. This difference in criteria emphasises the need for consumers to use a whole-of-market equity release broker, like Boon Brokers.

The Age of the Youngest Borrower

Your age will have a direct impact on the interest rates available. With Lifetime Mortgage Equity Release products, you may have access to better interest rates as you age. Lifetime Mortgage lenders may offer lower interest rates to older applicants as there is a greater chance that the loan will be redeemed in a shorter time frame compared to loans to younger borrowers. This is different to traditional mortgages, where age has no impact on the interest rate.

The Applicant’s Health Conditions

The applicant’s health conditions can also impact the interest rate offered. Generally speaking, the worse an applicant’s health, the better interest rates are available. Again, this is because an applicant in poor health is likely to pass away sooner than a health applicant of a similar age, meaning that the lender receives their loan in a quicker timeframe. Some Equity Release lenders offer exclusive interest rates that are only available to applicants with certain health conditions.

With Lifetime Mortgages, the interest rate can compound if you do not meet the monthly interest payments. This means as your interest accrues the loan amount grows and the future interest grows too.

This is opposite to traditional mortgage interest rates which are only charged on the capital you borrow. With Equity Release, interest is charged on both the capital and the existing interest that has built up.

What Other Fees Are Involved with Equity Release?

Fortunately, there are minimal fees payable during an Equity Release transaction. For an Equity Release case, you should expect to pay a booking, solicitor, and broker fees. Valuation costs are typically financed by the lender.

According to Money Saving Expert, the average fees payable for an Equity Release transaction is between £1500 and £3000. When you explore Equity Release you will need specialist advice to understand the product fully and find to the right product for your situation.

Equity Release brokers will typically need at least two meetings with you prior to arranging an Equity Release product and some brokers charge additional fees for this service. Broker fees vary widely across the market and there are some brokers who charge upwards of £2000 for their services.

Fortunately, there are fee free Equity Release brokers like Boon Brokers who provide the Equity Release advice and arrangement without charging a penny. Fee free brokers take their payment by way of a commission from the Equity Release provider when your case completes at no expense to you.

No Negative Equity Guarantees and the Equity Release Council

You might be alarmed at the way interest rolls up on Equity Release, especially as interest payments on the loan are not payable until you pass away or go into long term care.

Unfortunately, there are some unregulated Equity Release providers who will keep rolling up the interest beyond the value of your property, leaving your next of kin with a substantial bill to pay.

The Equity Release Council (ERC) was set up to provide ethical regulation to the Equity Release market and providers who operate as a member of the ERC offer a no-negative equity guarantee.

This guarantee means that you cannot legally owe more than the value of the property. Any negative equity on paper is written off by the lender on redemption.

9 out of 10 Equity Release providers are registered members of the Equity Release Council and provide a range of consumer protections on their products. Unfortunately, this means 10% of the Equity Release market still offers products that can cause significant financial hardship to your next of kin.

Speak to a Specialist

It is vitally important that you seek out professional advice about Equity Release and only approach providers and brokers who are members of the Equity Release Council.

Boon Brokers is a Whole of Market Mortgage, Insurance and Equity Release Brokerage. Boon Brokers provides fee free Equity Release advice and is a proud member of the Equity Release Council.

Contact us to discuss your Equity Release and interest rates today.