Costs of equity release explained

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 2020 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.

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.

  1. The amount you borrow
  2. The interest rate you are charged
  3. The length of time the equity release plan is in place (which might correlate with your age)
  4. 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 fees and charges for simplicity – more on these below.

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 RateAmount repayable if Sally lives until she is 75Amount repayable if Sally lives until she is 85Amount repayable if Sally lives until she is 95
15%£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, 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 RateAmount repayable if Sally lives until she is 75Amount repayable if Sally lives until she is 85Amount 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 RateAmount repayable if Robert lives until he is 65Amount repayable if Robert lives until he is 75Amount repayable if Robert lives until he is 85
15%£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 RateAmount repayable if Robert lives until he is 65Amount repayable if Robert lives until he is 75Amount 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 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.

How can I reduce the cost of equity release?

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.

Consider using drawdown, rather than taking everything as a lump sum upfront

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.

Consider using a fee-free 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. We have partnered with Key Group who offer fee-free advice on their entire range of products. As they are limited to their own range of products you won’t have the full selection of products in the market to choose from but given an advice fee can add a substantial amount to the overall borrowing amount it might be worth speaking to them first as a free port of call. Key is a member of the Equity Release Council and has an excellent customer service rating on Trustpilot. You can call 0800 188 4813 or request a free, no obligation callback.

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.

If you are interested in a free, no obligation conversation with one of Key Group’s equity release specialists, you can call 0800 188 4813 or request a callback here.

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.

Links with an * by them are affiliate links which help Rest Less stay free to use as they can result in a payment or benefit to us. You can read more on how we make money here.

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