When you have a long-term commitment, such as an outstanding mortgage on your home or a business venture struggling to make any headway, it can be difficult to see the light at the end of the tunnel. When this happens, many people choose to release their equity to generate some cash flow.
However, releasing equity takes time and money and can be quite complex for those who don’t know what they are doing.
What’s Equity Release?
Equity release is an act of releasing your equity to generate some cash flow. Equity Release is often used with a long-term commitment, such as an outstanding mortgage on your home or a struggling business enterprise that has not generated any revenue for an extended period. This process takes time and money and can be quite complex if you don’t know what you are doing.
There are two types of releases commonly practiced by lenders within the industry; Drawdown Fee (also called “draw”), where no upfront fees are required, but there will be monthly repayments until all funds have been drawn down and the Fixed Fee Release (also called “capital release”) where there is an upfront fee that can range from £1000 up to £50,000 depending on how much you need.
Exactly How Much Does Equity Release Cost?
There is no “one size fits all” answer to this question, depending on your circumstances. If you can’t work out an estimate for how much equity release will cost, or even if you want a quick way of working one out.
The equity release calculator estimates the costs based on two variables:
- The amount borrowed (available)
- How long until death.
This will give you an indication of what the monthly repayments are likely to be, but please note that there may be additional fees involved, such as legal fees, valuation fees,s, etc., which will depend entirely on your circumstances. Therefore, it’s important not to make any assumptions and get in touch with a financial adviser before taking out an equity release.
The calculator will work out what your monthly repayments would be so you can compare between different products, see if they’re affordable for you or not.
Then this gives you some idea of how many years of retirement income are being replaced by a single repayment plan from an Equity Release Company. This way, you’ll know whether that loan has impacted other aspects of your life, such as living costs, etc.
How Expensive Will the Equity Release Costs Be?
Equity Release Costs are expensive. The Equity Release Company will charge fees for the loan, plus interest that they add onto your debt over time. It’s important to remember that these charges vary between lenders, so you need to research thoroughly before coming to a decision, as this could impact how much equity release costs in total.
It pays not only to consider the initial cost but also any ongoing monthly repayments, too, if you want to calculate what it would be like looking at both sides of the equation from start to finish – which is usually around 25 years or more!
It’s always best not to jump straight into anything without taking some time out for consideration and getting financial advice from a financial adviser who knows all about things like this.
Equity release is not a decision to be taken lightly. The fees can add up quickly, so it’s worth taking some time out for consideration before making any commitments – speaking to an independent equity release adviser, who will explain all of your options in detail and make sure you’re as well-informed about everything as possible is always best practice when looking into equity release.
What Fees Will You Pay?
Some of the costs associated with equity release are:
- The cost to set up a home reversion plan, which is an initial fee that can be paid in instalments
- Monthly repayments on your loan and interest charges (or you could choose not to pay any interest – but these fees will count against the value of your property)
- Costs for looking after the house and garden while it’s empty (which may include services such as gardening or refuse collection)
- Stamp duty land tax if you sell your property at some point during the financial burden of looking after them.
It is important to note that equity release isn’t for everyone based on your circumstances and lifestyle. Still, it could be an option you want to explore with the guidance of a specialist lender or advisor. In addition, the use of equity release can give you more options in life – including being able to travel when you’ve always wanted too long as someone else looks out for your property while you’re away.
Furthermore, suppose there are any changes in the law, such as tax allowances becoming less generous. In that case, this will also have a knock-on effect on how much money people save than they otherwise would do without taking these things into account. So it’s crucial not just to start saving today because we know what might happen tomorrow!
When Should You Pay Your Equity Release Fees?
As soon as you know the amount of money required to release your equity, it can be helpful to start saving up. You’re probably not going to want a situation where people have to pay their fees after they have retired and need them for medical bills or other emergencies – so try and get everything sorted beforehand by starting early on in life!
It gets better:
Some lenders will allow you to defer paying some of your interest payments until you take out an Equity Release plan- this means there is less pressure on those who just cannot afford these sorts of costs now but may well be able to in the future when their finances might change.
However, it’s worth getting advice from specialist mortgage advisors about if this could work for you because otherwise, it could end up being more expensive in the long run.
You might expect a high interest rate if your home has been bought with multiple mortgages or other loans – these are known as ‘more complex’ equity release products and so can have high rates because of their inherent risk.
Again, you’ll want to do some research on this before going ahead but also bear in mind that while there may be a higher cost upfront for such plans, they will often provide increased monthly payments, which means less pressure down the line when people need them most (such as retirement).
It’s worth noting, too, that not all Equity Release Scheme is the same. So you will want to consider what is most suitable for your circumstances.
What Interest Rate Will I Pay for My Equity Release?
The interest rate is the cost of borrowing money. Therefore, one of the main things to look at when comparing Equity Release Plans.
Several different factors come into play, including how much you’ve saved so far in your Lifetime Mortgage account (the more savings you have, the lower your monthly payments will be), as well as what type of mortgage product or loan it relates to – such as a repayment plan with a fixed term (these typically have cheaper rates than other types).
Many equity release providers offer lifetime mortgages that charge no interest for the first ten years after signing up. This means they can’t profit from their investment during this period but could still end up being useful if someone needs an increased level of care.
Do I Need to Pay Tax on Equity Release?
Wealthier homeowners considering equity release should be aware that they may need to pay tax on the capital released. This will depend upon whether or not you have used any of your Lifetime Mortgage balance against your current home, and if so, how much has been repaid.
Let me tell you something,
The amount of money you repay in a period is known as an ‘achieved drawdown’. The number of achieved drawdowns payable against property can affect its value for Inheritance Tax purposes – this means there could be implications for younger family members. Paying such taxes might seem like more hassle than it’s worth but understanding what they entail allows people to make smarter decisions about their finances overall.
Essential Things You Should Consider Before Agreeing to Equity Release:
- What are my alternatives?
- How will I pay back the loan?
- Will this be affordable for me in future years?
This list is not exhaustive, so it’s worth consulting an expert. You can speak with a specialist advisor from a regulated mortgage lender or get advice through your bank and building society. They’ll want to know about your financial situation and how each type of plan would work for you in that context.
The earlier you contact them, the more options they have available too! Being aware of these costs helps people make smarter decisions about their finances overall.
It is important to note that loans advanced against properties owned by two spouses usually attract inheritance tax if one dies. For this reason, many people choose a ‘joint and survivor’ option.
What Are the Costs Associated With a Lifetime Mortgage Specifically?
Most lenders will charge an application fee, and this may be charged upfront or towards the end of your equity release term. You’ll also have to pay additional interest, usually linked to the lender’s standard variable rate (SVR) set by the Bank of England plus up to 0.25%.
Suppose you’re using money from property owned jointly with someone else (usually your spouse). In that case, there are inheritance tax charges that would apply in certain circumstances on any loans advanced against it, so please contact Equity Release Planning Limited for further advice if this applies to you.
In a nutshell,
Equity release is a great way to help you get the financial freedom and independence that you deserve. In addition, it can give your loved ones peace of mind knowing they will always have someone there for them in their time of need, without having to worry about how much money they may or may not have saved up for retirement.