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How much does equity release cost?

If you want to access cash tied up in your home, it’s worth understanding how much equity release costs, how it works, and whether it is better for you than alternative options.

Summary

  • Equity release is a way to access cash tied up in the value of your home without selling it.

  • There are two main types of equity release: home reversion and lifetime mortgage.

  • Equity release schemes have various fees and interest rates that depend on your circumstances.

  • A mortgage broker can help you decide if equity release is a good option for you.

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What is equity release?

Equity release refers to a financial arrangement that allows you to access and use the equity (cash) tied up in your home as an asset without selling it. 

There are two primary types of equity release schemes.

Home reversion scheme

Under a home reversion scheme, you sell part or all of your home to a home reversion company in exchange for monthly payments or a lump sum.

With this type of equity release, you can use the cash but continue to live in your home without paying rent for the rest of your life.

Lifetime mortgage

A lifetime mortgage does not require you to sell your home. Instead, you agree with your lender the maximum amount you can borrow against the value of your house.

This amount is paid to you as one lump sum or in a series of smaller payments.

It is up to you to make repayments over the loan period or allow interest to accumulate.

Payment will then be claimed (usually by the sale of your house) upon your death or entry into permanent elderly care.

How do equity release interest rates work?

It is important to consider the cost of equity release and seek out the best interest rates.

As of March 2024, the top equity release rate was 5.34%, according to Simply Equity Release.

There is no standard equity release interest rate, as interest rates depend on your circumstances.

Factors taken into consideration by lenders include your age, the value of your home, your health and lifestyle, and how much equity you’d like to release from your mortgage, among other things.

As you do not need to make any monthly payments on a lifetime mortgage, the interest on your loan compounds as time goes by.

This means that your compounding equity release interest, which is charged on the principal loan as well as the accumulating interest, can grow substantially throughout the loan period.

This is one way a lifetime mortgage differs from a regular mortgage, which entails monthly repayments.

Most equity release providers add the compound interest of your balance on an annual basis.

You may have the option to settle your loan and interest before the end of your loan term.

However, you may have to pay substantial early repayment charges, depending on your provider’s limits.

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What are the equity release fees, and how do they work?

The different types of equity release arrangements in the UK involve various fees.

The main types of equity release fees include arrangement, valuation, advice and legal fees.

Arrangement fee

An arrangement fee is an equity release fee that covers the cost to your provider of setting up your equity release arrangement, such as a lifetime mortgage. Not all providers charge arrangement fees.

Certain types of equity release providers charge a product fee, which is usually a percentage of the total amount released.

Valuation fee

This equity release fee covers the cost of valuing your property, though not all providers charge for this in the same way.

Advice fees

By law, you must obtain professional financial advice to sign up for an equity release product.

Depending on your provider, you may obtain (and pay for) this advice independently, or the provider may source an adviser on your behalf. 

For the latter, the provider will either charge you a fee for this service (typically around £1,500) or pay the adviser a commission on the completion of your equity release arrangement term.

Legal fees

You will also need a solicitor to advise you on the legal aspects of your chosen type of equity release.

Usually, you will need to obtain and pay for this service independently.

Legal fees vary considerably between firms and are based on your needs, but the average fee for a standard case is typically around £750.

Transfer fees

Transfer fees cover the cost to the provider of transferring your money to your solicitor, as is often the case with standard mortgages. Not all providers charge for this.

What are the alternatives to equity release?

As there are various downsides to equity release, you may want to consider one of the alternative ways to free up cash during your retirement.

  • Downsizing: Move to a smaller, cheaper property and use the profit from selling your former house for living expenses or other costs. Remember that there are both pros and cons to downsizing.

  • Rent out part of your house: Lower your costs by renting part of your home to a tenant. The UK government has the Rent a Room scheme, where you can earn up to £7,500 tax-free each year by renting out furnished accommodation.

  • Wait longer to retire: The later you retire, the larger your nest egg will likely be by the time you retire.

  • A retirement interest-only mortgage: This alternative is cheaper than the cost of equity release because you pay off the interest as it accumulates.

  • Use other savings: It’s worth doing this before accessing your pension. 

Want to learn more about equity release?

If you’d like to free up cash using equity release, it’s important to understand how it works, the costs, and what the pros and cons are before you decide if it is for you.

If you need more information or assistance, let Unbiased match you with a mortgage broker.

Under the guidance of a professional, you can learn more about equity release and get expert advice on any products.

Get equity release advice
We’ll find a professional perfectly matched to your needs. Getting started is easy, fast and free.

About the author
Our team of writers, who have decades of experience writing about personal finance, including investing, retirement and pensions, are here to help you find out what you must know about life’s biggest financial decisions.