If you’re over 55 and considering accessing wealth that’s locked away in your home, it’s likely that equity release is firmly on your radar. Our comprehensive guide will equip you with the knowledge you need to make an informed decision on whether equity release is right for you and why interest rates play a crucial role in any borrowing, while also addressing the age-old fixed vs. variable interest debate.
Why are interest rates important?
Interest rates are the charges set by each individual company for lending money. They’re the heartbeat of the financial world, allowing you to compare the cost of borrowing money and make well thought-out financial decisions. When considering long-term lending, an additional 0.1% of interest can make a substantial difference to your total repayments, so understanding the options available is crucial.
What affects interest rates?
Lenders set their own interest rates, heavily influenced by market conditions and the Bank of England’s base rate. Other factors that affect the interest rate for equity release include:
- The loan-to-value rate (LTV) – this is the amount you’re borrowing compared with the value of your property
- Your age and health
- The type of property
- The lender’s own criteria
- Your credit history
Fixed vs variable interest: which is right for me?
Variable interest rates are often lower than fixed interest rates for equity release at the start of a loan. Variable rates are based on the market conditions of today and can go up or down over the course of the loan, changing the amount of interest you ultimately pay, up to a capped amount. Fixed interest rates are fixed for life, so you’ll know exactly what you’ll be paying from the outset.
It’s impossible to predict future interest rates; if you select a fixed rate and rates go down, you’ll see no reduction in the amount you repay. However, if rates increase on your fixed-rate plan, you’ll still pay the same amount, regardless of the changes in the market. Your attitude toward risk will play an important role in the fixed vs. variable interest rate debate, and it’s best to talk this through with a professional.
Interest only vs. compound interest: what are my options?
The interest on the equity you’ve released from your home can be repaid in the following ways:
- Alongside the loan amount, which is subject to compound interest upon death or permanently entering long-term care
- Monthly, by paying the interest that accrues as it’s added, which is known as an interest only basis
Compound interest increases the loan amount each year and can be seen in the following example:
Loan amount: £60,000
Interest rate: 6%
Year 1: £60,000 + £3,600 compound interest = £63,600 loan
Year 2: £63,600 + £3,816 compound interest = £67,416 loan
Year 3: £67,416 + £4,044.96 compound interest = £71,460.96 loan
Year 4: £71,460.96 + £4,827.66 compound interest = £75,748.62 loan
Year 5: £75,748.62 + £4,544.92 compound interest = £80,293.54 loan
As you can see, the interest is added to the loan amount and the interest that has already accrued with compound interest, though the interest isn’t payable until the plan comes to an end.
Conversely, with an interest only plan, you’re able to keep the final loan amount the same as when you began the equity release plan, as long as you make regular repayments to cover the interest.
How do I choose the right equity release plan for me?
Releasing the wealth from your home comes with a number of options that you won’t have encountered on previous home loans, such as mortgages. That’s why talking with a professional about your personal circumstances is crucial before making any big decisions regarding your home. Talk with our friendly team today to find out if equity release could be the right option for you.
Equity Release will reduce the value of your estate and can affect your eligibility for means tested benefits.