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How much does it cost to release equity in your home?
If you’re nearing retirement or already retired and own your home, equity release could be used to release money tied up in your home. This money can be used for your retirement years, or to support your family financially by tapping into inheritance money early.
As with any financial decision, you will have questions, and usually, the first one is how much does it cost to have equity release arranged?
There are a few fees involved. Some are payable upfront with others being able to be added to your loan or paid from the money released once an equity release plan completes.
The fees are variable and will include three services:
- Your financial advisor fees
Specialist financial advice is required before you can take out an equity release plan. The fees vary by financial advisor and are usually paid after your plan completes. Some advisors charge a fixed fee, others a percentage of the total money released. Figures from April 2018 issued by the Equity Release Council show that the average lump sum payment customers released was £96,483, and for those using drawdown, the initial payment taken averaged £64,797.
Percentages of funds released as fees can be 1.95%. If you were to release a lump sum of £96.483, the fee payable would be £1,881.42 based on a 1.95% fee. In cases where a percentage is used to calculate fees, check for minimum fees as releasing £10,000 could be subject to a minimum flat fee of £995 or upwards.
The fees for financial advice don’t always need to be paid upfront. Many are paid on completion, and some advisors will provide a no completion, no fee service. Others will charge for advice regardless of whether your plan completes, and you receive funds or not.
- The lender fees
Lenders will have arrangement fees which are to cover their costs as they need to arrange for a property valuation and to cover the legal costs involved in setting up your plan. Depending on the lender you choose, there can be an application fee due to begin the application process.
Generally, lender fees tend to be around £995 and include legal fees, application fees and surveyor fees. Like your advice fee, lenders can allow their fee to be paid on completion or added to the loan amount. It should be remembered that any fees you add to your loan, will be subject to compounded interest, which will increase the cost as the interest accrues on the whole balance with interest over the life of the plan.
With regards to the surveyor costs, equity release providers base the maximum you can release on your properties current market valuation and your home needs to be in a good state of repair to be able to use it as security. If the surveyor identifies any issues that affect the structural integrity of your home, you may be required to have repairs carried out to bring your house up to standard before it can be accepted as security. Where necessary repairs are identified, this could substantially increase the cost. It may be possible to use funds released to be used for home repairs, but it will need to be agreed with the provider before they’ll approve to release funding.
- Your solicitor’s fee
There are two requirements you must meet with regards to the legalities of setting up an equity release plan. The first is that you need to have a face-to-face meeting with a solicitor, and the second is that the solicitor you choose needs to be independent. That means that unlike typical mortgage products where the lender can provide free legal services provided by their panel of solicitors, that’s not possible with equity release solicitors. There can be no affiliation between the lender and the solicitor acting on your behalf.
Typical fees for solicitors overseeing equity release is around £1,000. At the face-to-face meeting, you’ll be required to bring ID verification with you. Your solicitor needs to verify your identity to comply with UK anti-money laundering legislation. Once your ID is verified, it’s the solicitor’s job to check the details on the properties title deeds are correct, up to date, and that you have sufficient buildings insurance in place.
Your solicitor only starts work after a lender has provided an initial offer for you to accept. When you receive your offer and are happy to proceed, that’s when to make an appointment with an independent solicitor to oversee the process. If you have an existing mortgage to be paid off, your solicitor will also handle this for you, paying what’s left after all fees due paid are settled by bank transfer.
A solicitor can only oversee the legalities of your plan but cannot advise on any aspect of it. Only a financial advisor can advise you on financing options. While any conveyancing solicitor can act as your independent solicitor, it is worthwhile working with someone who specialises in equity release. There’s an organisation called the Equity Release Solicitor’s Alliance (ERSA) with equity release solicitors all being members of the Equity Release Council and therefore have more experience in this type of finance. You can find a list of members on their website – ERSAlaw.co.uk. You aren’t required to use an ERSA law member, but you do need to have an independent solicitor to act in your best interest.
Stamp Duty Fees
While all providers will tell you that the money released is tax-free, it is not always made clear that it is subject to stamp duty tax. Where this becomes an issue is if you release over the threshold which as of 2019 is £125,000. If you release equity over £125,000, 2% stamp duty tax may be incurred, depending on your personal circumstances. The rates increase to 5% for funds released between the amounts of £250,001 - £925,000, with higher rates for larger sums.
These rates apply to residential homes that is your primary place of residence and not on second homes. If you’re using an equity release provider that allows for equity release on a second home, stamp duty of 3% applies to all funds released up to £125,000, then increases to 5% for funds released above that figure. Your financial advisor will discuss stamp duty with you from the outset if it is going to apply to your situation.
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How much does it cost to ‘arrange’ equity release?
Arranging an equity release plan usually costs between £2,000 and £3,000. The total cost of equity release is going to be much higher when you factor in compounded interest rates. The two to a few thousand it costs to get your funds only start your plan. The real cost is what accrues over the life of the lifetime mortgage as interest is charged on interest accrued.
Most providers state they use compounded interest. To be clear, that means it is continuous compounded interest which applies interest to the capital owed plus interest. In practice, using equity release for a lump sum payment of £10,000 at a fixed rate of compound interest of 4.5% applied annually would cost £450 in the first year, then £470.25 in the second year, £491.42 the following year and so on.
By year five, an initial £10,000 equity release plan would have climbed to a balance of £12,461.82. As you can see, from an initial interest of £450 in the first year, over five years, that increases to £2,461.82 in interest charges.
That’s based on a minimum £10,000. The average most customers release is far higher, so the effect of compound interest needs to be understood before entering into an equity release plan. And it’s also the reason the Equity Release Council require all providers to have a no negative equity guarantee as without it, costs would surely escalate to beyond your home’s value.
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