Equity release enables you to access money that is tied up in your home. It can be useful for anyone who is looking to raise a cash lump sum or boost their income. However there can be significant costs involved and it is not suitable for everyone.
While there are technically two types of equity release products, according to the Equity Release Council almost 99% of all equity release products taken out in 2023 were lifetime mortgages, so we will focus on the costs involved in taking out a lifetime mortgage in this article. You can read more about the other, less common form of equity release product, home reversion, here.
Want to speak to a mortgage advisor? Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage.
If you’re looking for expert mortgage advice, you can get a free consultation with an independent mortgage adviser at Fidelius. Speak with a qualified, FCA-regulated, independent mortgage adviser you can trust. Rated 4.7/5 on VouchedFor from over 1,250 reviews.
What are the costs involved with equity release?
As you might expect, the costs associated with taking out an equity release product can vary widely depending on a number of key factors. The single biggest cost is almost always the interest you will end up owing on the amount you borrow.
The cost of borrowing is one way of thinking about how much it might cost to take money out of your home with a lifetime mortgage, the most common form of equity release.
This cost of borrowing is particularly sensitive to four main things.
- The amount you borrow
- The interest rate you are charged
- The length of time the equity release plan is in place (which might correlate with your age)
- Whether you choose to repay the interest on a monthly basis, or let it roll up over time
Perhaps the easiest way to understand how this might look is with some examples, although please note that we have ignored the impact of equity release fees and charges for simplicity – more on these below. If you want to see how much you might be able to release from your home and how much it could cost you, our Equity Release Calculator can give you an estimate.
Impact of the interest rate charged and the amount of time the equity release plan is in place
Sally plans to borrow some money to pay off her existing mortgage when she retires. She wants to unlock £30,000 of her property wealth via equity release and is aged 65. She does not want to make monthly interest payments and so plans to roll up the interest she owes to be repaid when she dies or moves into long term care. Below is what her cost of borrowing would look like with different interest rates if she lived in the house for 10, 20 or 30 years respectively.
Sally is 65 and wants to borrow £30,000 (interest is rolled up and paid back when her house is sold)
| Interest Rate | Amount repayable if Sally lives until she is 75 | Amount repayable if Sally lives until she is 85 | Amount repayable if Sally lives until she is 95 |
| 3% | £40,495 | £54,662 | £73,785 |
| 4% | £44,753 | £66,763 | £99,596 |
| 5% | £49,459 | £81,542 | £134,436 |
If Sally was able to make monthly repayments of the interest owed, to stop it building up over time, the total cost of borrowing could look quite different, especially if the equity release plan was in place for a long period of time – see example below:
Sally is 65 and wants to borrow £30,000 (interest is paid monthly to stop it compounding)
| Interest Rate | Amount repayable if Sally lives until she is 75 | Amount repayable if Sally lives until she is 85 | Amount repayable if Sally lives until she is 95 |
| 3% (Monthly interest payments of £75) | £38,995 | £47,990 | £56,986 |
| 4% (Monthly interest payments of £100) | £41,988 | £53,976 | £65,964 |
| 5% (Monthly interest payments of £125) | £45,011 | £60,022 | £75,032 |
In this second scenario, Robert wants to release money from his home in order to fund some home improvements. He is 55 and wants to borrow £50,000 – again he does not want to make monthly interest payments and so plans to roll up the interest owed and repay it, along with the initial loan amount when he dies or moves into long term care. Below is what Robert’s cost of borrowing would look like with different interest rates and assuming he lived in the house for 10, 20 or 30 years.
Robert is 55 and wants to borrow £50,000 (interest is rolled up and paid back when his house is sold)
| Interest Rate | Amount repayable if Robert lives until he is 65 | Amount repayable if Robert lives until he is 75 | Amount repayable if Robert lives until he is 85 |
| 3% | £67,492 | £91,103 | £122,975 |
| 4% | £74,589 | £111,272 | £165,994 |
| 5% | £82,433 | £135,904 | £224,061 |
Borrowing the same amount, if Robert was able to make monthly interest repayments on his loan to stop the loan increasing in size then the cost of borrowing could look quite different, especially over longer time horizons – see below:
Robert is 55 and wants to borrow £50,000 (interest is paid monthly to stop his loan increasing in size)
| Interest Rate | Amount repayable if Robert lives until he is 65 | Amount repayable if Robert lives until he is 75 | Amount repayable if Robert lives until he is 85 |
| 3% (Monthly interest payments of £125) | £64,993 | £79,986 | £94,978 |
| 4% (Monthly interest payments of £167) | £69,980 | £89,960 | £109,940 |
| 5% (Monthly interest payments of £208) | £75,018 | £100,035 | £125,053 |
If you’d like to get a quick indication of the costs involved, we built a calculator to try and give you a sense of how much a lifetime mortgage might cost over 10, 20 or even 30 years. It also allows you to compare the costs of a lifetime mortgage where you are making monthly interest repayments vs instead choosing to roll up the interest without making any monthly repayments.
Other equity release fees and charges
In addition to the interest payable, it is important to understand the other fees and charges that might be payable, and that we excluded from the examples above. Some of the common types of fees and charges that are incurred are:
- A financial advice fee to the advisor who sets up the equity release product
- Product arrangement fees
- Property valuation fees
- Legal fees such as a solicitor or conveyancer
- Buildings insurance – providers will insist on you maintaining appropriate buildings insurance to protect the property
- A completion fee
- Any early repayment charges – in case you wanted to pay the loan off early
- A maintenance budget to keep the property in reasonable condition.
- These costs will vary by provider but could add up to between £1,000 and £3,000 which can substantially increase the total cost of borrowing, especially on relatively small loan amounts.
When do I need to pay my equity release fees?
The bulk of your equity release fees and costs is made up of your interest payments, which you will be charged on a monthly basis, but don’t necessarily need to pay monthly.
As for the other fees and costs we list above, you will usually need to pay them at different times:
- Financial advice – not all advisors charge fees for their advice, but if they do they will usually be payable on completion. You will often be given the option to add this to your loan if you opt for a lifetime mortgage, or you will be able to pay it from the funds you receive.
- Product arrangement fees – these will usually be included in the fees you pay on completion and typically cover the administration costs of setting up your equity release product
- Property valuation fees – These are generally paid when you submit your application for an equity release product and your property is valued by a surveyor.
- Legal fees such as solicitor or conveyancer fees – these are typically paid when you receive your funds on completion.
- Buildings insurance – this will be due when you arrange the product, and much like any other type of insurance you will usually be given the opportunity to pay it all in one go, or in regular instalments.
- A completion fee – as the name suggests, this fee is usually paid when you receive your funds on completion.
- Any early repayment charges – in case you wanted to pay the loan off early, these charges would be paid as and when you want to repay early.
Do I need to pay tax on equity release?
Generally, no, you do not pay tax on money received from an equity release plan, even if it’s used to top up your income.
However, there could be some tax implications, depending on how you use the money received from equity release. For example, if you placed the lump sum from equity release into a savings account, you may need to pay tax on any interest received that breaches your personal savings allowance (PSA). This allowance enables you to earn £1,000 interest on your savings tax-free as a basic-rate taxpayer, or £500 as a higher-rate taxpayer. You can find out more about house the PSA works in our guide What is the Personal Savings Allowance?
How does equity release affect inheritance tax?
As equity release reduces the value of your estate, it may affect whether your estate will need to pay inheritance tax. Under current rules, the inheritance tax threshold, called the ‘nil-rate band’, is set at £325,000 and any assets over and above this amount are subject to tax of 40%. If releasing equity from your home means the value of your estate falls below this threshold, and provided you spend the funds released rather than invest them, you won’t have to pay inheritance tax.
To find out more about the impact your equity release might have on what inheritance tax your estate will pay, have a look at our article Understanding Inheritance Tax.
How can I reduce equity release costs?
Thankfully there are a number of ways to reduce the overall cost of using equity release.
Make sure you get the best interest rate
All else being equal, the interest rate you are charged will have a significant impact on the overall cost of equity release. Even seemingly small percentage differences can add up to significant increases in overall costs when compounded over many years.
While you should always look to get the best interest rate for the product features you want, it’s important to note that different product features will have different interest rates associated with them – even if they are from the same product provider. For example, products with greater flexibility will typically have higher interest rates. A good financial advisor will help you navigate this complexity, talk you through your options and help you select the most suitable product for your circumstances.
Consider using drawdown, rather than taking everything as a lump sum upfront
Some products now offer flexible drawdown where you release only the amount you need, as you need it, and are able to draw down additional money as required over time. If you plan to roll-up the interest on your loan, and only pay it at the end when your property is sold – this flexible drawdown approach can reduce the overall cost of borrowing significantly as you only start accruing interest on the money you actually need. This type of equity release can be most helpful for those using equity release to top up their income.
Make monthly interest payments to stop the loan size increasing
One of the main concerns with equity release is the cumulative impact of interest charges compounding over time. Einstein famously declared compound interest the 8th wonder of the world as it grows so fast, but unfortunately in this scenario it favours the product provider, rather than you! Many products now enable you to make regular monthly interest repayments to help keep the loan amount under control. There are a variety of repayment plans available like this that help you keep the interest charged manageable, rather than letting it continue to compound so it’s worth considering if you think you might be able to commit to relatively small monthly repayments.
It’s worth noting that these types of equity release products are increasingly similar to another type of mortgage product called a retirement interest-only mortgage. As the name implies, you only pay the interest on the mortgage and the balance is repaid when you die or sell the house. You can read more about retirement interest-only mortgages.
Use an equity release advisor
It’s a regulatory requirement from the UK financial regulator, the FCA, to take financial advice when arranging an equity release product. This is to make sure that any product is suitable for your needs and circumstances. It’s essential that you use a specially trained equity release specialist and that they will only recommend you a product from a member of the industry trade body, the Equity Release Council. This is vital because the trade body insists on a number of minimum product standards to protect borrowers.
The downside of financial advice is that it comes at a cost – sometimes quite a substantial one which can run into thousands of pounds, so it’s worth being clear on exactly how much you’ll pay before proceeding.
Where can I get help and advice on equity release
Taking money out of your home through equity release is a big financial decision so it is important to do as much research as you can so you can make an informed decision.
If you’re ready to speak to someone, it’s essential to use an advisor who is trained in equity release and who can recommend a suitable product from a member of the Equity Release Council (ERC) to ensure that a number of minimum product standards are met to help safeguard borrowers.
Want to speak to a mortgage advisor? Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage.
If you’re looking for expert mortgage advice, you can get a free consultation with an independent mortgage adviser at Fidelius. Speak with a qualified, FCA-regulated, independent mortgage adviser you can trust. Rated 4.7/5 on VouchedFor from over 1,250 reviews.
Alternatively, if you’re looking to find out more about equity release before speaking to someone we have a range of additional information on equity release in the following articles:
See how much wealth you could unlock from your home with this free, easy to use calculator. Fill in a few details to get an estimate – and if you’d like some advice, arrange to speak to an expert.