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A guide to equity release interest rates

Article | Mar 2024

If you’re considering equity release, the most popular product available is a Lifetime Mortgage. And like other types of mortgages, your lender will charge interest on it. If you’re considering how to unlock the value of your home, you may be asking “what are the interest rates on equity release?”

It’s a very important question, as knowing about the up front and future costs can help you to make an informed decision on what to do with the value within your home.

At Responsible Life, we specialise in offering advice on Lifetime Mortgage products. This typically offers you two options: either a Lump Sum or a Drawdown product. Each can also come with a variety of flexible features.

In this article, we will explore the interest rates available with equity release, outline how it is paid back, and explore the options available to reduce your costs.  

What are the equity release interest rates and how do they work?

The primary cost associated with equity release that most homeowners will wonder about is the interest rate costs. With equity release, the interest will compound, meaning that it increases over time. Our products come with fixed-for-life interest rates, so you can visualise how the amount you owe could change throughout your lifetime.

What is compound interest?

With compounding interest, the amount of interest is not charged on the original amount borrowed, but on the amount borrowed plus the previous period’s interest. In this way, the amount you owe will increase and reduce the value of your estate.

Your adviser will explain this during your consultation. An illustration of how interest affects your borrowing might look something like this:

An example interest rate table from an equity release Key Facts Illustration.
An illustrative example of equity release interest rates

What are the current equity release interest rates?

Currently, the lowest interest rate that we have seen is 5.46%. On average, our customers have been able to secure an interest rate of 6.64% so far this year. The rate available to you will largely depend on your personal circumstances, including how much cash you want to release.

How much will I owe?

Ultimately the amount of money that you will owe is heavily influenced by the interest rates. The higher the initial amount of equity that you choose to release, the faster the compound interest may grow.

You can use Responsible Life’s free equity release calculator to gain an understanding of the amount of money you could release from your home. It is important to note that the youngest homeowner needs to be 55 or older. The age of the youngest homeowner and the current valuation of your property determines the maximum amount that you could release from your home.

Controlling the costs

With a Lifetime Mortgage, you are in control of the costs. You can make penalty-free voluntary interest payments during your lifetime, often up to 10% of the initial amount borrowed each year. These payments can be made monthly to reduce the amount owed over time. You can also stop making these payments at any time should your circumstances change.

If you choose a Drawdown option, you can place some of your equity in an interest-free reserve and only pay interest on the cash you have actually accessed, “drawing down” further sums as you need them. This can help to ensure that you aren’t being charged interest on cash that you don’t have an immediate need for, reducing the overall costs. Do note, though, that interest will be fixed on each release from your reserve at the prevailing interest rate of the time, which may be higher or lower than your initial release.

Your adviser will be able to provide more information on these voluntary payments and other costs.

When will you pay back the interest on equity release?

When you take out equity release you will not have to pay back any of the interest, or the initial amount borrowed, until the last homeowner either passes away or enters long-term care.

The amount of money that you owe will never total more than the valuation of the property at that time. However, the value of your estate will be reduced and your entitlement to means-tested benefits may be affected. There are also early repayment charges if you want to pay back all the money owed early.

Take the next step to releasing equity

If you want to find out more about equity release interest rates, why not schedule a call with our Information Team today? They can give you an estimate of the amount of tax-free cash available and book you in for a free initial consultation with an adviser.

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