Over 55, short on cash (or simply looking for a more secure retirement), but own your home and all your money is tied up in it? Equity release could be the answer. interest rates are at their lowest in years. So let me quickly go over the key points you can think about.
How does equity release work?
It is a mortgage that isn’t paid off until you die or go into long term care. If you don’t have someone to leave your assets to, it’s a good way to get more money.
If you have people to leave assets to, equity release usually means that they will inherit less. However, it is your money, so maybe its right for you. There are two types of equity release products:
1. Lifetime mortgage
This is the most popular and for those aged 55+. You borrow a portion of your home’s value at a fixed or limited interest rate (see below for more). Since you don’t make payments to the (although you can if you want to) lifetime mortgage, the debt compounds and the amount you owe grows over time – unlike a traditional mortgage.
Some ‘drawdown’ versions allow you to take the money in stages whenever suits you and you only pay interest on the money you have borrowed so you do not need to take all of the money up front. You can pay back the interest (and in some cases, even some of the capital) to lower the total cost. It allows you to withdraw funds from your property in small increments up to a predetermined sum, with interest paid on the amount you withdraw rather than the total amount accessible.
2. Home reversion plan
You need to be aged 65+. You sell a lender all or part of your property for a reduced amount and they give you a tax-free lump sum for it. The property is then yours to live in (rent-free) until you die or when you go into long term care. When it’s sold, the proceeds are divided based on the percentage you own and the percentage the lender owns.
How much does equity release cost?
The average lifetime mortgage equity release rate is about 5%, though some rates are as low as 2.5% (as of May 2021). This is lower than it has been for many years, but it is still considerably higher than most regular mortgage rates.
If you don’t make monthly repayments to reduce the loan, the interest compounds and the debt increases over time. For example, if you borrow £20,000 at 5.1% on a £120,000 home when you’re 60, the amount you owe will double every 14 years.
So, if you live until 74, you’ll owe about £40,000, and if you live until 88, you’ll owe £80,000.
Some rates from lenders have arrangement fees. Depending on the arrangement being arranged, this can vary from lender to lender. You may also have other fees such as application fees, legal fees, and surveyor fees.
What affects the interest rate charged?
Many factors contribute to the interest rate for your lifetime mortgage. These include:
Requested Loan to Value
The sum you need to borrow as a percentage of your property has the greatest effect on your interest rate. In general, the higher the interest rate, the closer you are to the maximum amount you can release.
Your credit history will impact the available plans and the interest rates. And if you have pending credit issues, you may be eligible for Equity Release. Some lenders also give you the option of using your Equity Release to pay off these debts.
Every lender has a different underwriting process and different features on their plans. Extra features, such as a reserve facility or inheritance security, can require you to pay a higher interest rate due to the extra features.
Lending conditions can also restrict your options when it comes to finding a loan. If the lenders offering the best interest rate products don’t accept your house, for example, you’ll have to find another lender that will, which could come with a higher interest rate.
Extra fees, such as completion fees, are charged by certain lenders, and these fees may impact the interest rate. It’s important to consider the plan’s overall cost over the projected period since plans with lower interest rates often come with additional costs that can make the plan more costly.
While your age has no bearing on your interest rate, it does have an impact on the maximum amount you can borrow. This, in turn, affects the interest rate, as the interest rate is usually higher the closer you borrow to the maximum amount available.
If you’re married and want to take Equity Release in one name only, some lenders won’t allow this. To be eligible for all lenders and products, you must own and submit in joint names.
Remember, when calculating the interest rate, lenders use the youngest borrower’s age.
AER vs MER – what’s the difference?
When looking at Equity Release interest rates, you’ll find that some are expressed in MER and others in AER.
What’s the difference, though? The Annual Equivalent Rate is abbreviated as AER. The annual rate of interest (AER) is the rate of interest added over a year.
The Monthly Equivalent Rate is abbreviated as MER. The MER is the annual rate of interest divided by the number of months in the year. In most cases, the MER is significantly lower than the AER.
Let’s take a look at why.
You normally don’t have to make any monthly payments for a lifetime mortgage. Interest is usually measured and applied to the loan monthly, and if you do not make any payments, the loan balance will rise marginally each month.
If you make no payments, the interest added annually at a MER of 2.63% becomes an AER of 2.66% at the end of the year. (AER / 12 = monthly interest added.)
If you’re comparing interest rates, make sure they’re of the same sort to ensure an accurate comparison.
Fixed vs variable interest rates
At the inception of the plan, the majority of lifetime mortgage interest rates are fixed for life. This means you’ll know exactly how much interest you’ll pay for the duration of the deal and won’t be stung if interest rates rise.
Lifetime mortgages have variable rates comparable to residential mortgages. Lifetime mortgages are often related to the Consumer Price Index.
“Our variable rate lifetime mortgages are connected to the Consumer Price Index (CPI), and the CPI is adjusted each year in December according to the CPI shown on the Office of National Statistics (ONS) website,” says One Family, a lender that offers variable rate equity release.
One Family currently offers a two-year fixed rate, after which the rate adjusts under the Consumer Price Index (CPI).
One of the Equity Release Council’s guidelines is that all variable rates must have an upper limit for a plan to meet requirements. This gives you a sense of security because you know what the highest interest rate is.
In recent years, we have primarily recommended fixed interest rate products because they are often less expensive than variable-rate plans and provide full certainty.
How to find the best equity release interest rates
Use our equity release or lifetime mortgage finder tool to find the different rates on the market and find the best equity release interest rates. It displays the maximum loan size, the loan to value (LTV) ratio, and the best equity release interest rates available.
You’ll be able to see all lifetime mortgage products, as well as the best equity release rates . When you’ve made your decision, contact us so we can discuss your options further. One of our expert equity release advisers will then contact you to discuss your options.
Equity release plans come in a variety of shapes and sizes. Your situation determines the kind you should choose.
How can I get equity release advice?
If you’re considering releasing equity from your home, there’s a lot to consider.
You may even wonder if equity release is right for you. If it all seems a little overwhelming, or if you want to make sure you’re making the best decision possible, investing time in getting some equity release advice can be worthwhile, so why not contact us for a free no obligation chat.
You may discuss the mechanics and costs of equity release with our specialist equity release adviser . They will also help you determine whether or not an equity release is a suitable option for you and your circumstances.
It’s a smart idea to use equity release advisors for this type of product, so you know exactly what you’re getting into. It would help if you understood how this form of mortgage could affect the amount of equity you have in your house. You’ll also want to consider how much money you’ll be able to pass on to your family.
If you plan to proceed, an advisor will advise you on which equity release company is best for you, as well as which to avoid.