One of the most appealing things about using an equity release scheme to unlock some of the value tied up in your home is that the money you take does not have to be paid back for many years.
Typically, equity release providers are only repaid when customers die or move out into long-term care.
Nonetheless, the eventual cost of such schemes can be significant – and there may also be some initial charges relating to the setting up of your equity release plan.
So how much will equity release actually cost?
What is equity release?
These really depend on the provider you choose, but be sure to check what fees you face before you agree to a plan.
You can expect to pay your financial advisor for the guidance they offer, as well as the provider’s administration or application fees.
On top of that, you might have to pay a solicitor for carrying out the necessary conveyancing work as well as the surveyor who values your property.
The way such charges are dealt with can vary: some firms will offer cashback deals or add the costs to the total loan.
According to the Equity Release Council, typical overall costs are between £2,000 and £3,000.
The Saga Equity Release Advice Service makes no charge for an initial appointment, and if you are recommended the Saga Equity Release Plan then there are no advice or arrangement fees to pay and a contribution is made towards legal fees.
The most popular type of equity release plan is a lifetime mortgage.
This typically allows you to borrow a lump sum against your property: the money is repaid, with interest, only when you die or move into long-term care.
Interest rates on lifetime mortgages tend to be higher than on standard residential mortgages.
And because no repayments are made as the scheme goes on, interest charges can mount up quickly: remember, each year the interest due is added to the overall loan and from then on will itself accrue interest.
As an example, at a fixed interest rate of 6%, an equity release loan will double in size after roughly 12 years. At 5% this would take 14 years.
How much your equity release deal will actually cost depends on how long it runs for – and this is impossible to predict.
But it is important you ensure you sign up for a plan with a “no negative equity” guarantee: this means that what you or your family owe the provider can never exceed the value of your property.
By taking money from your lifetime mortgage in instalments through a drawdown scheme rather than as an initial lump sum, you can reduce the amount of interest you’ll have to pay.
Are you still paying off your mortgage?
Home reversion plans
The other main type of equity release scheme is home reversion, where you sell a share in your home to a provider in return for a lump sum and the right to remain living in your property.
How much this actually costs depends on what that share is worth when your home is eventually sold against what its value was when the deal was struck.
For example, imagine you sell a 40% share in a property worth £200,000 in return for a lump sum of £40,000 (this is at a discount to the £80,000 that this share is actually worth because the provider will have to wait many years to get its money back).
If your house was eventually sold for £300,000 after you died or moved into care, the provider would be entitled to £120,000 of the sale proceeds.
Discover more information on equity release and moving house