How Does Equity Release Interest Work?
When it comes to equity release, understanding how interest is calculated and added to your loan is crucial.
Over time, this interest can significantly increase the overall amount you owe.
The two most common types of equity release products – Lifetime Mortgages and Home Reversion Plans – have different approaches to interest.
In a Lifetime Mortgage, you borrow a portion of your home’s value, and interest is charged on this amount.
Crucially, this interest is compounded, meaning that over time, you’re not just paying interest on the initial loan, but also on the accumulated interest. This can cause the loan balance to grow quickly.
For instance, if you take out a Lifetime Mortgage of £100,000 at an annual interest rate of 5%, after one year, you’d owe £105,000. The second year, you’d be charged interest on £105,000, making your debt £110,250, and so on.
On the other hand, a Home Reversion Plan involves selling a portion of your home for less than its market value, rather than borrowing against it. As such, it doesn’t accumulate interest in the same way.
It’s important to be aware of these potential implications, as equity release could impact the size of the estate you leave behind and your eligibility for means-tested benefits.
Always ensure you fully understand the terms and implications before proceeding with an equity release plan.
Current Equity Release Interest Rates
As of 2023, the average equity release interest rates in the UK hover around 6.21% to 8.99% APR. However, these rates can vary quite considerably.
The table below shows the current equity release rates as of 4 August 2023. Keep in mind that these rates might have changed since we last updated.
| Lender | Product | Rate (MER) | Type | Offer |
|---|---|---|---|---|
| Legal & General | Premier Flexible Pearl | 5.78% | Fixed | Free Valuation |
| Legal & General | Premier Flexible Opal | 5.87% | Fixed | Free Valuation |
| Pure Retirement | Classic Drawdown Super Lite 2 | 6.03% | Fixed | Free Valuation |
| Legal & General | Premer Flexible Graphite | 6.17% | Fixed | Free Valuation |
| Standard Life Home Finance | Horizon 240 Drawdown | 6.19% | Fixed | Free Valuation |
| More2Life | Flexi Choice Super Lite | 6.22% | Fixed | Free Valuation |
| Standard Life Home Finance | Horizon 240 Drawdown Fee Free | 6.24% | Fixed | Free Valuation, no application fee |
| Aviva | Enhanced Lifestyle Flexible Option | 7.00% | Fixed | Free Valuation, no application fee |
| CanadaLife | Capital Select Gold (Flexible) | 7.15% | Fixed | Free Valuation, no application fee |
| Pure Retirement | Sovereign C Elite Drawdown (Fee Free) | 8.07% | Fixed | Free Valuation, no application fee |
Your individual age, the value of your property, and the specific rules of each provider primarily cause this rate variation.
Despite this, the interest rate shouldn’t be your only focus. There can be additional costs tied to your equity release plan that you must be aware of.
These might include arrangement fees, valuation fees, and solicitors’ fees, all of which can add to the overall cost of the plan.
What is the Best Rate You Can Get on Equity Release?
Several factors can affect the interest rate you’re offered for equity release. To give you a hint, the best interest rate you could get on equity release in Aug 2023 is 5.74% (MER)*. Yet, this figure doesn’t paint the whole picture.
Why? Because your own rate depends on your personal situation and the kind of equity release you choose. And keep in mind, rates can change.
Moreover, going for the lowest rate might seem like the best move, but it doesn’t always mean you’re getting the best deal.
A lower rate could mean less to pay back over time, but it might also come with higher upfront costs or fewer flexible options. So, it’s crucial to look at the whole picture.
Consider the rate, any extra charges, and the plan’s rules and conditions to really understand what you’re getting.
*Just a quick note – rates may have changed since this article was last updated.
Factors Affecting Equity Release Interest Rates
Equity release interest rates aren’t pulled out of the blue; they’re shaped by many factors:
- Loan-to-Value Ratio – This is a biggie. If you want to borrow a large chunk of your property’s value, you might find the interest rates creeping up.
- Property Value – Again, if your property is worth a lot, lenders might feel safer and offer you lower rates.
- Health and Lifestyle – Got certain health conditions or lifestyle habits? You might get what’s called an ‘enhanced’ plan with lower rates.
- Age and Marital Status – Older folks and couples applying together could find rates going higher. That’s because you can usually borrow more the older you are, which might bump up the rate.
- The Provider – Different providers have different rules and might assess risk differently. This could affect your rate.
- Economic Conditions – Things like inflation, the Bank of England’s base rate, and even demand and supply can push and pull the rates around.
- Lender’s Business Strategy – Sometimes, lenders might drop their rates to pull in more customers.
- Product Features – Certain features, like Inheritance Protection, might affect your rate.
- Future Property Value Projections – Lenders might consider what your home could be worth in the future.
- Credit History – A poor credit history doesn’t stop you from getting equity release, but it might stop you from getting the best deals.
- Other Costs – Don’t just look at the interest rate. Remember to check setup fees, early repayment charges, and the total cost.
So, while understanding these factors is handy, getting the best deal means looking at the big picture.
This often needs a professional’s touch, so it’s a good idea to get advice from a qualified broker or advisor.
Equity Release Interest Rates: Fixed vs Variable
When considering equity release, it’s essential to understand the two primary types of interest rates you might encounter: fixed and variable rates.
Fixed rates remain constant throughout the loan’s duration, ensuring the amount of interest you pay doesn’t fluctuate over time. This is beneficial because it provides certainty about future loan costs, allowing for precise budgeting.
But, one potential drawback is that if general interest rates decrease, a fixed rate doesn’t change to reflect this, possibly resulting in higher interest charges than with a variable rate.
On the other hand, variable rates can alter over time, often linked to an external benchmark such as the Bank of England base rate.
The main advantage is the potential to benefit from lower interest costs if rates decrease. But the risk lies in the possibility of rates increasing, which could lead to higher costs down the line.
Pro-Tip
Remember, with equity release, you don’t usually pay off the interest during your lifetime. It usually gets settled when your property is sold, move into long-term care, or after you’ve passed on. Before choosing an equity release product, always weigh its advantages and downsides.
What are APR and MER and How Do They Differ?
APR stands for Annual Percentage Rate. It is a measure of the total cost of borrowing money, including interest, fees, and other charges. The APR is expressed as a percentage of the amount borrowed, and it is calculated over a period of one year.
MER stands for Monthly Equivalent Rate. It is a measure of the cost of borrowing money, expressed as a monthly rate. The MER is calculated by dividing the APR by 12.
The main difference? APR includes any extra charges linked to the loan, while MER is all about the interest. This means that the APR is a more accurate measure of the true cost of borrowing money.
When comparing different loan options, it is important to look at the APR, not the MER. The APR will give you a more accurate picture of the true cost of borrowing money.
And remember, it can be really useful to chat with a financial advisor or use an online APR to MER calculator to understand these terms better.
What is an AER?
AER, which stands for ‘Annual Equivalent Rate‘. It’s typically used for savings accounts and shows the rate of interest you’d earn if it was paid and compounded each year.
How to Lower Your Equity Release Interest Rates?
Reducing the interest rate on your equity release can save you a significant amount in the long run. Here are some simple steps to take:
- Shop Around – Don’t settle for the first offer. Look for multiple options and compare their rates.
- Use a Broker – Professional brokers have access to exclusive deals and can assist you in finding the most suitable offer.
- Only Borrow What You Need – More substantial loans typically have higher interest rates. By only borrowing what you need, you can potentially secure a lower rate.
- Maintain Good Credit – While credit checks aren’t as stringent for equity release as regular mortgages, some lenders still consider your credit history.
However, it’s crucial to understand the potential risks associated with equity release. These could include reducing your estate’s value, impacting your eligibility for means-tested benefits, and possibly generating early repayment charges if you decide to repay the loan sooner.
The Bottom Line: Take the First Step
Understanding equity release interest rates is critical to informed financial decision-making. It’s not just about finding a low rate, but considering additional costs and the factors that influence them.
With equity release, remember, the interest builds up and is deducted from the sale of your property or when you move into care.
Getting professional advice is essential for a complete understanding. This is where specialist mortgage brokers shine.
They’re the best way to secure best rates, as they can sift through the complex market and guide you to an equity release plan that aligns with your financial aims and lifestyle.
Ready to get started? Fill out our quick form and we’ll connect you with a specialist mortgage broker who can offer expert guidance on your equity release journey. Don’t wait, get started today.
