Equity release interest rates

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If you have questions about Equity Release interest rates read on or talk to an expert by making an enquiry, or using our online chat.

You don’t need to have paid off all your mortgage to be eligible for Equity Release but the more equity you have built up, the wider your choice of Equity Release interest rates and lenders.

Before delving into where you can find the best rates, we’ll look at the differences between agreements that let their borrowers pay off compounding interest vs those that don’t, as this will affect the amount you pay for your Equity Release overall.

How do Equity Release interest rates work?

Equity Release lenders provide finance by allowing eligible homeowners to access a portion of their home’s equity as cash.

The loan is charged at a rate of interest and is secured against your home, meaning that when you pass away or move into full-time care, it’s sold, with the proceeds being split between the lender who recovers the debt and your beneficiaries (if you have any).

The longer the agreement spans, the more interest that accumulates or ‘compounds’, which is why the term length of your Equity Release agreement should be calculated with an advisor, who can explain the pros and cons of different amounts over different term lengths.

What does compounding interest mean?

If the Equity Release plan has an interest rate that is rolled up, it means that at the end of the first year, the amount of interest charged will be added to the amount you first borrowed.

The next year, the interest will be ‘compounded’ – meaning it’s calculated based on the sum of the original loan, plus the interest charged during the first year. This continues in the same way for every month or year that follows.

How does the length of my Equity Release agreement affect how much interest I owe?

You must be at least 55 to access Equity Release in the UK but be mindful that releasing equity at a young age through a roll-up lifetime mortgage might not always be the cheapest way to borrow money as the interest payments roll up or accumulate each year.

This gradual build-up over the year could result in a hefty bill at the end of the agreement and although this is settled with the sale of your property, it could mean your beneficiaries inherit less money.

For example, if a 55-year-old homeowner with a property valued at £200,000 took out an Equity Release agreement for a £50,000 tax-free lump sum, at an interest rate of 3.5% and they lived for another 10 years, the amount their estate would owe on payment would be £67,516 (including mortgage debt, £50,000 + total interest £17,516).

If that homeowner were to live 20 years after the agreement started, as opposed to 10, their estate would owe £85,033 (including mortgage debt, £50,000 + total interest £35,033).

Can I pay the interest off Equity Release?

Interest-only lifetime mortgages allow the borrower to repay the interest and avoid owing more at the end of the agreement than they borrowed.

The cash released is still a tax-free lump sum and the associated interest charges are usually repaid monthly.

Better still, some Equity Release agreements with interest repayments included, allow their borrowers the flexibility of accessing more funds in the future, with a pre-approved flexible borrowing facility.

To find lifetime mortgage providers that allow customers to pay off interest, ask one of our advisors for more information.

What is the average Equity release interest rate in the UK?

The amount of interest a lender charges for Equity Release can vary but in the Spring 2020 Market Report, the Equity Release Council reported that average interest rates for Equity Release were 4.48%

While some rates on the lower end of the scale start upwards of 2%, some lenders can charge between 8- 10% for Equity Release finance.

Everyone’s circumstances are different, so a one size fits all quote for Equity Release interest rates isn’t accurate.

How much interest will I be charged for Equity Release?

Typically, an interest rate below 3% is extremely good, 4% good and 5% is an average rate.

Rates of 6% upwards are usually offered on Equity Release agreements if the requested amount is substantial or when the borrower has affordability or circumstantial issues that could present a risk to the lender for loss,

To know more about the interest rate you can expect to be charged, speak to a Mortgage Hut Equity Release expert.

They’re qualified to provide guidance on later-life lending and can look at your unique situation and find relevant, competitive lenders.

What affects the interest rate for Equity Release?

How much you want to borrow

Releasing a larger percentage of your property’s equity means borrowing more and generally, lenders charge a higher rate for higher requested loan-to-value rates.

Whether you’re married or not

UK lenders will be hesitant to approve an Equity Release agreement if the applicant is married but wants to access the agreement in one name only.

If you’re married, your spouse will likely have a right to equity built up in your property which is why lenders will require you to apply in joint names.

The plan and product features you opt for

Most Equity Release lenders have additional features that they provide as “add ons” to their customers such as underwriting, a reserve facility or inheritance protection. Including these in your agreement can cost more and therefore you might be expected to pay a higher rate of interest.

Some plans with lower interest rates can initially seem tempting but when you add on the cost of the product features, the total cost of the plan over the term could be significantly increased.

An Equity Release advisor looks at the lending criteria can also have an impact on limiting the market for you. For example, if the lenders offering the best interest rate products don't approve of your property, you will have to choose a lender who will, which could be at a higher interest rate.

Does bad credit affect the interest rate for Equity Release?

Having bad credit won’t necessarily stop you from getting Equity Release but it will make it difficult to access lenders with the most competitive rates.

Your credit history will be assessed by Equity Release lenders upon application, so if you’ve had a County Court Judgment (CCJ), or have been bankrupt in the past, you’ll likely pay a higher rate of interest.

Some homeowners use Equity Release to resolve debts including their mortgage and there are a small group of lenders who understand this and have less stringent criteria.

An Equity Release advisor can check the UK market and find the lenders who accept bad credit homeowners and highlight the ones with the best rates.

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