What interest rate can I achieve on Equity Release? What is good?
When you’re looking into Equity Release plans there are a lot of factors to consider, one of the biggest is the interest rate, but what interest rate can be achieved? and more important what is a good interest rate?
The Equity Release Council noted in its Autumn 2022 Market Report that the average interest rate for Equity Release is 4.26%.
Let’s take a closer look at how Equity Release interest rates are calculated as well as the factors that affect them. Importantly we’ll see if there’s anything that can be done to reduce the rate of interest you pay on your Equity Release.
Do you have to pay interest on Equity Release?
A Roll-Up Lifetime Mortgage is a loan secured against your home. The provider gives you a lump sum, but you do not have to pay interest or capital. Instead, the interest is ‘rolled up’ and added to the total loan. The full amount of rolled-up interest and loan is designed to be repaid when you pass away or move into permanent long-term care.
You can also get a Lifetime Mortgage or Home Reversion where you do pay the interest, and these types of plans are widely available. Because interest can compound very quickly, the amount owed can grow very quickly. For example, a loan amount of £20,000 can double in 11 years on an interest rate of 6.5 per cent a year. For that reason it’s always worth seeking financial advice to get the best plan for your situation.
What are the current Equity Release interest rates?
With Lifetime Mortgage interest rates at an all time low, now might be a good time to look into Equity Release. Below we have a selection of some of the lowest interest rate products on the market:
| Provider | Plan | AER | APR | Type Variable / Fixed | Product |
|---|---|---|---|---|---|
| Pure Retirement | Sovereign A | 2.83% | 3.08% | Fixed | Tax Free cash and Drawdown |
| More 2 Life | Flexi-Choice Super Lite | 2.84% | 3.00% | Fixed | Drawdown |
| Aviva | Lifestyle Flexible Option | 2.91% | 3.00% | Fixed | Tax Free cash and Drawdown |
| Canada Life | Lifestyle Select Lite Flexi | 2.93% | 3.08% | Fixed | Tax Free cash and Drawdown |
| LV | Lump Sum+ Lite 1% Cashback (Fee Free) | 3.08% | 3.10% | Fixed | One off lump sum |
| Scottish Widows | Lifetime Mortgage LS2 | 3.09% | 3.10% | Fixed | One off lump sum |
| Legal & General | Flexible Pink | 3.09% | 3.20% | Fixed | Tax Free cash and Drawdown |
| JUST | Just For You Lifetime Mortgage | 3.76% | 3.80% | Fixed | Tax Free cash and Drawdown |
| Please Note: Rates correct as of 1st December 2021. Rates vary by provider and depend on your personal circumstances and whether you prefer a cash lump sum or an income . | |||||
Can I reduce the rate of interest I pay on my equity release scheme?
When you’re looking at releasing equity and want to reduce the rate of interest you’re liable to pay on your equity release scheme, there are a number of product features that can help:
Drawdown reserve
A drawdown Lifetime Mortgage allows you to release an initial sum of money and create a reserve account of further funds that can be accessed at a later date. Interest isn’t charged on the reserve until the money is released.
Downsizing protection
Downsizing protection means that if you choose to sell your home and move to a smaller property you can repay the loan with no early repayment charges.
Interest repayments
You can make full or part-interest repayments with some products without incurring early repayment charges.
Loan repayments
More than three-fifths of the products provided by members of the Equity Release Council allow you to make partial repayments on the loan itself without incurring an early repayment charge.
How to calculate Equity Release interest rates?
Calculating equity release interest rates is dependent on a number of factors. To help you visualise what happens over the course of your product we’ve put together a free equity release calculator.
Equity Release interest example
Consider Bob and Sue, a fictional couple, Bob is 73 and Sue is 71. The market value of their house is £525,000 and they want to release equity so that they can repay their car finance and interest only mortgage. They would like the option to downsize their home if one of them passes away and are happy to make payments towards the equity release interest owed.
We recommend that they use Aviva and release £207,000 with an interest rate of 3.47% MER (3.51% AER) – they pay no lenders fees up front and pay £5 on completion.
—
Paul and Julie, aged 75 and 76 respectively, want to release equity so that they can repay their loans and existing mortgage. They live in an ex-council house currently valued at £225,000.
We recommend that they use Just Retirement and release £119,500 with £5,125 cashback. They get an interest rate of 5.40% MER (5.55% AER) and pay no lenders fees upfront or on completion
—
Phil, another fictional character, is 62 and lives alone. At current market value his home is worth £600,000. Phil wants to release equity and repay an existing mortgage and have access to further funds to help his retirement. Phil’s currently out of work and using credit cards for day to day living costs.
We recommend that phil uses More2Life and releases £51,757 upfront and keeps 120,302 in reserve. He gets an interest rate of 3.09% MER (3.11% AER) and pays no lenders fees upfront or on completion.
Check out our equity release calculator to find out how much you could possible release
What factors affect the Equity Release interest rate?
Age
The older you are, the larger the amount of money you can borrow. This is because your life expectancy is lower. If a product is taken out jointly, the amount received in your equity release loan is based on your age limit and the life expectancy of the younger person.
Product features
Because all lenders underwrite their products in different ways, this may have an impact on what’s available to you. For example a lender offering the best interest rate on the market for lifetime mortgages may not approve of your property which means you may have to opt for a lender with a higher interest rate.
Lenders may also offer different features on their plans. Products which have features like inheritance protection or a reserve facility could mean you wind up paying a premium with a higher interest rate.
Some equity release lenders will also impose additional expenses, like finishing fees, which will impact the interest rate. It is vital to consider the whole cost of the plan over the expected period, as lower interest rate plans may include extra costs that make the plan more expensive.
Credit History
Your credit history may also affect which plans are available to you and consequently the interest rates available to you. If you’ve had County Court Judgements or been declared insolvent you could still be eligible for Equity Release, some of the lenders even allow you to use the Equity Release to repay the debts.
Requested Loan to Value
The most significant impact on your interest rate is the amount you require to borrow as a percentage of your property. Generally, the closer to the maximum available to you which you wish to release, the higher the interest rate.
Marital Status
If you’re married and apply as a couple, lenders use the age of the youngest partner to work out how much equity you can release. This in turn will have a knock on effect with how much you can borrow and the interest rate you’ll get on that product.
Some lenders are open to taking one name only when you’re applying for Equity Release but some won’t which limits your options.
Surveyor’s valuation
Each lender will have its own set of criteria that the surveyor must be aware of and follow. The procedure involves working out your properties current worth at that point in time while taking into account location, condition, type of property, whether it is a leasehold property type ,marketability, and current market mood by referring to comparable properties in the area. The way a property is scored by each surveyor for each different lender will have an impact on your Equity Release interest rate.
AER vs MER – what’s the difference?
AER stands for the Annual Equivalent Rate and gives us the rate of interest added over one year. Where MER stands for the Monthly Equivalent Rate and shows the rate of interest added over the year but divided over every month.
Lifetime mortgages usually do not require you to make any monthly payments. Commonly interest is calculated and added to the loan monthly, and if you are not making any payments, as the months’ pass, your loan balance increases slightly more each month.
The table below illustrates how interest added monthly at an MER of 2.89% becomes an AER of 2.92% at the end of the year if you don’t make any payments. (Monthly interest added = AER / 12).
| Month | Opening Balance | Interest Charged at 2.89% | Closing Balance |
|---|---|---|---|
| 1 | 15,000.00 | £36.13 | £15,036.13 |
| 2 | £15,036.13 | £36.21 | £15,072.34 |
| 3 | £15,072.34 | £36.30 | £15,108.64 |
| 4 | £15,108.64 | £36.39 | £15,145.02 |
| 5 | £15,145.02 | £36.47 | £15,181.50 |
| 6 | £15,181.50 | £36.56 | £15,218.06 |
| 7 | £15,218.06 | £36.65 | £15,254.71 |
| 8 | £15,254.71 | £36.74 | £15,291.45 |
| 9 | £15,291.45 | £36.83 | £15,328.27 |
| 10 | £15,328.27 | £36.92 | £15,365.19 |
| 11 | £15,365.19 | £37.00 | £15,402.19 |
| 12 | £15,402.19 | £37.09 | £15,439.29 |
Fixed Vs Variable Interest Rates
Fixed equity release interest rates are set at the outset and do not need to be renewed; they are fixed for life, regardless of how long the mortgage runs.
With variable interest rates the initial rate may be lower than a fixed-rate plan. But your interest rate will be reviewed after the initial fixed period and subject to changes and increases over time. The interest rate is updated annually on 1st December, based on the CPI for September.
What is the lowest interest rate on equity release?
Pure Retirement’s Sovereign A plan has one of the lowest interest rates at 2.84% AER. It’s worth remembering though when looking at equity release products that although the interest rate may be low there may be hidden costs and charges associated with the plan. It’s well worth speaking to an independent financial advisor to make sure you’re getting the best deal for your circumstances.
What is the best interest rate on equity release?
The best equity release interest rates as of November 2022 are:
| Provider | Rate |
|---|---|
| Legal & General | 2.3% |
| Pure Retirement | 2.32% |
| Legal & General | 2.9% |
It’s worth remembering that although a low interest rate on Lifetime Mortgages may look good, there may be fees associated with releasing equity that wind up making it more expensive than other plans with higher interest rates. In addition to that some plans may offer attractive incentives like a negative equity guarantee.
For that reason it’s always best to get financial advice and speak to an independent financial advisor when looking at Equity Release mortgages.
Will Equity Release interest rates fall?
Although you can never say with absolute certainty whether interest rates will rise or fall, Equity Release interest rates are currently significantly lower than they were 8 years ago down to around 3.3% compared with 6.8% in 2013.
If you’re in a variable rate plan then if interest rates do fall you will see a reduction in your interest but if you’re in a fixed rate plan then the interest rate would stay the same no matter what happens in the market.
Are Equity Release interest rates fixed?
To adhere to the Equity Release Council standards all lifetime mortgages must have fixed rates or if they’re variable, there must be an upper limit “cap” in place which is fixed for the life of the equity release product.
Is Equity Release compound interest?
Most equity release products have the potential to incur compound interest, but, you won’t pay equity release compound interest on a Home Reversion Plan. That’s because the way it’s structured is so that your product provider has percentage share ownership of your home.
Also with a Serviced Lifetime Mortgage, the interest never has a chance to compound (‘roll-up’) because you pay it on a monthly basis and then pay the balance at the end of the plan. So not all equity release products are subject to compound interest.
If you’re considering equity release we recommend that you reach out for a free, no obligation chat, to see what’s best for you.
Alternatives to Equity Release
One thing to think about when it comes to equity release is how it impacts any inheritance you’d like to leave. We’ve put together an article on alternatives to equity release that are well worth considering as well.
Get specialist Equity Release advice
We know equity release can be a big decision for you to make, which is why we’ve teamed up with the UK’s number one equity release adviser and member of the Equity Release Council, Age Partnership.
The Age Partnership adviser will make sure you understand all the options available to you.
Equity release may involve a home reversion or a lifetime mortgage, which is secured against your property. To understand the features and risks, ask for a personalised illustration.
Equity release requires paying off any outstanding mortgage. Any money released, plus accrued interest would be repaid upon death, or moving into long-term care.’
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