Thinking about equity release as a financial solution? Don't forget to consider all the costs. It's important to weigh all your options and seek professional advice before making a decision.
Chris Hill, a Director and Chartered Financial Planner at Centurion Chartered Financial Planners, outlines the key cost points to consider before you make a decision on equity release.
There are several costs to consider when looking at equity release:
Interest – Lifetime mortgages incur interest. This can either be paid monthly or allowed to accumulate. The higher the rate of interest the higher the monthly payments or the faster the debt will grow. For example, a debt of £100,000 over 10 years at 4% would grow to £148,000, whereas at 6% it would grow to £179,000.
Conveyancing Costs – As equity release is a secured debt, the land registry must be updated to show the charge and the equity release company will require certain checks to be undertaken before they will complete the transaction.
Financial advice costs – The implications of taking out equity release need to be properly considered along with alternative options. This requires a suitably qualified financial adviser to advise whether equity release is fitting, and which contract is most appropriate for your circumstances. All financial advisers charge for their advice; however, the method and amount vary considerably.
Product fees – These are an initial cost made by the equity release company in order to access a lower rate of interest or a specialist product.
Early repayment charges – These are charges that may apply if some or all the lifetime mortgage is repaid. There are two main methods of calculating the early repayment charge:
Fixed – a set percentage is applied to the amount repaid, which is often reduced the longer than the lifetime mortgage has been in force.
Variable – the charge is calculated based on a comparison of the interest rate on Government borrowing (known as Gilts) to when the lifetime mortgage was originally taken out.
Administration charge – This is a charge usually levied when the lifetime mortgage is repaid.
The cost of setting up an equity release contract can often be several thousands of pounds, so it is important to take advice on all your options before committing to take out equity release.
Equity release involves borrowing money against your property and it can affect your entitlement to state benefits and/or state funding for care costs. If you take out an equity release you will incur a debt and interest costs. Other more appropriate solutions may be available and professional advice is vital.
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