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How much does equity release cost?
Equity release is a way to access the equity in your home without having to move. It can be a great option for those who need extra money but don't want to sell their home. But what are the costs associated with equity release?
There are several costs associated with equity release which include arrangement fees, early repayment charges, interest rates and advice fees. Each lender and product will have different costs associated with them, so it is important to compare the different options available before deciding on a product.
It is always recommended that you seek advice from an expert when considering taking out an equity release plan as there are many factors to consider before making a decision. At Teito, our friendly team of advisors have helped many people like you weigh up the pros and cons of equity release and find the right option for them. Get your equity release journey started now and we promise to make the process as stress-free as possible!
How much does it cost to release equity?
Equity release can be an attractive option for those who need extra funds in the form of tax-free cash, but don’t want to move house.
But before you decide to take out an equity release plan, it’s important to understand the costs associated with it. Equity release fees include set-up costs, valuation fees, legal costs, interest, as well as an advice fee.
Arrangement Fee
The most common fee associated with equity release is the arrangement fee. Set-up costs typically range from £500 to £2,500 and are a one-off payment to cover the lender's set-up costs of the plan.
Equity Release Interest Rates
Equity release interest rates vary between lenders and depend on the type of equity release scheme you choose.
Generally speaking, the interest rate is higher than those of a standard mortgage. In general equity release interest rates range from 5-8%.
It is important to understand that these loans can be expensive over time due to compound interest, so it is essential to consider all options before taking out an equity release plan.
Solicitor Fees
Equity release solicitor fees are typically £650 but the average solicitor's fees' fees vary widely, so it's worth comparing a few prices before you make your own decision. It is recommended that you find a solicitor with experience in equity release to help ensure the process runs smoothly.
Valuation Fees
In many cases, lenders offer a free valuation when using Equity Release. However, if completion takes longer than six months, a revaluation may be required.
Access to benefits
Accessing equity release can have an impact on certain types of benefits you may be receiving, depending on the type of benefit and how it is calculated.
Cash released from an equity release plan is not typically counted as income for means-tested benefits, but it could still affect your eligibility.
For example, if your entitlement to a certain benefit is based on a means test which takes into account both income and savings, then taking out equity release might reduce or even stop your access to that benefit entirely.
Early repayment fees
Early repayment charges (ERC) may be imposed by the provider if you want to pay off some or all of the amount borrowed before a certain period of time has elapsed. The amount and length of time for which ERCs apply will vary between providers, so it is important to check with your provider before taking out an equity release plan.
For example, some providers may charge 7% in the first five years, 5% in years 6-8 and then nothing from year 9 onwards. Other lenders may let you pay off your loan without any penalty after a certain period of time.
Overall, understanding the costs associated with equity release schemes is essential if you’re considering taking one out. Make sure you seek expert advice before making a decision that’s right for you.
Types of equity release plan
The total cost of equity release will vary depending on the type of plan you choose.
Lifetime mortgage
A lifetime mortgage is a type of equity release loan that allows homeowners aged 55 and over in the UK to access some of the wealth they have tied up in their homes. With this type of loan, you can borrow money secured against your property while still retaining ownership.
The amount you can borrow depends on your age and the value of your home, and the loan is usually repaid when you die or move into long-term care.
There are several types of lifetime mortgages:
- Roll-up - A lump sum with no monthly payments required. Interest will build over time, but this is paid when you pass away or move to long-term residential care.
- Drawdown - This is comparable to a roll-up plan, but you receive the cash in instalments rather than a lump sum. Interest is only payable on the value of payments received.
- Interest-only - With this option, you can make monthly payments of the accrued interest reducing the final bill.
- Flexible - The full equity lump sum is received, but you can make payments throughout the term.
- Enhanced - These are for applicants with specific health conditions, allowing a higher amount of equity at a more favourable interest rate.
The main benefit of a lifetime mortgage is that it allows you to access tax-free cash without needing to move out. This means that you can use the money for whatever purpose you wish, such as making home improvements, paying off debts or supplementing your retirement income.
Home reversion plan
A home reversion plan is a form of equity release product that involves selling all or part of your home to a specialist provider in the UK. In exchange, you receive a cash lump sum or an income. Typically, you will receive between 30% and 60% of the value of your property.
With a home reversion plan, you can stay living in your home until you die or go into long-term care. You may also be able to access some of the money tied up in your property while still living there.
It's important to understand that with a home reversion plan, you are giving up part ownership of your property and any future increase in its value. It's also important to consider that there may be other options available for releasing equity from your home which could be more suitable for you.
How much will I pay back with equity release?
The amount you pay back with equity release depends on the type of product you choose and how much money you take out.
For example, with a lifetime mortgage, which is the most popular form of equity release, you don't have to make any monthly repayments and instead pay back the loan plus interest when your home is sold or when you die. The amount of interest that accumulates will depend on how long you keep the loan for and what type of product it is.
Do you have to pay a monthly fee for equity release?
Generally, there are no monthly payments required for equity release - instead, interest accumulates over time and is repaid when the loan matures or when the borrower dies or moves out permanently.
Many equity release products are designed to give you the flexibility to make repayments if you choose. However, it is important to note that some products may include early repayment charges or other fees if you decide to pay off your loan early. It is best to check with your provider before making any decisions.
What are the alternatives to equity release?
When considering retirement options, equity release may not be the best option for everyone. There are several alternatives to equity release that can provide a more suitable solution depending on your individual circumstances.
The main alternatives to equity release include:
Retirement Interest-Only Mortgages (RIOs)
Retirement Interest-Only mortgages (RIOs) are an alternative to equity release and are quite similar to lifetime mortgages, however, one important difference is that you will need to make monthly payments on the interest of the loan rather than paying off the capital and interest together as with a lifetime mortgage.
This means that you will retain ownership of your home until it is paid off in full or you pass away, at which point it will be sold and any remaining debt will be cleared from the proceeds of the sale.
Remortgaging
Remortgaging is another popular alternative to equity release as it allows you to access some of the value tied up in your home at a lower interest rate than equity release.
By remortgaging, you can borrow money against your property and use this money for whatever purpose you choose, such as making home improvements or consolidating debts into one manageable loan with lower monthly payments.
Downsizing
Downsizing is another option for those looking for an alternative to equity release as it allows them to free up some of their capital by selling their current property and buying a smaller one instead.
This can also help reduce running costs such as utility bills and council tax, freeing up more money each month which can then be used towards other expenses or saved for future use.
Personal loan
A personal loan is a type of unsecured loan that can be used for any purpose. It is usually paid back over a fixed period of time with regular payments, and the interest rate is usually fixed too.
Unlike equity release, you don't have to own your own home to take out a personal loan. You also don't need to provide any security - such as your home - as collateral against the loan. This means that if you are unable to make repayments on the loan, you won't risk losing your home.
Ultimately there are many alternatives available when considering retirement options so it’s important that individuals explore all possibilities before deciding which route is best suited for them based on their individual circumstances and goals going forward into retirement life!
Speak to an expert
It is always recommended that you speak to an expert for advice on the equity release process, as they can provide tailored advice based on your individual circumstances.
An expert will be able to explain all of the different types of equity release products available and help you decide which one is best for you. They will also be able to discuss any potential risks or drawbacks associated with equity release and advise you on how to minimise them. Additionally, they can provide guidance on other options available to you, such as downsizing or taking out a loan against your property.
It is important to remember that equity release should not be used as a way of solving short-term financial problems. If you are considering taking out an equity release product, it is essential that you speak to an expert first who can provide impartial advice and help ensure that it is the right decision for you.
At Teito, our friendly team can help you navigate the complexity of equity release mortgages, and help you find the best solution. Get started now and we promise to make the process as stress-free as possible.
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Last updated 21 February 2024