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What are the Latest Equity Release Interest Rates?

Suppose you compare quotes for equity release plans. In that case, you will see an interest rate crop up and other information relating to that figure. You may have a few questions behind these numbers, such as “is that a good rate?” or “can I get that interest rate lower?”.

This guide will look at the details behind the latest equity interest rates and the factors that drive them. Let’s start by looking at the fundamentals of equity interest rates.

What are Equity Release Interest Rates?

Equity release interest rates are an additional percentage of what you’ll pay on the lifetime mortgage or reversion scheme you take out against your home in exchange for cash. These interest rates can vary by equity release plan provider and change over time. However, they will generally all be around a similar figure.

How Do Equity Release Interest Rates Work?

Interest works on equity release depending on how long the plans run and the type you take out. The most common scheme is the ‘roll-up’ lifetime mortgage, where once taken out, interest works as below:

  • The interest charge gets added after the first month/year to the original loan.
  • Interest compounds based on the sum of the original loan plus the first month/year’s interest charge
  • You’ll pay the compounded interest for each month/year that passes.
  • Interest is calculated monthly/yearly on the growing amount (though the interest rate stays the same)

Even though the interest ‘rolls up,’ we note that it will never be more than your property is worth. We mentioned that interest rates stay the same once you take out your lifetime mortgage, but what affects the initial equity release interest rate?

What Affects Equity Release Interest Rates?

If you’re taking out a lifetime mortgage, the interest rates will vary based on various factors. Find below some of the variables that will affect your equity release interest rates.

Credit History

Your credit history plays an integral role in determining your interest rate. Suppose you’ve ever been made insolvent or issued Count Court Judgements (CCJs). In that case, you won’t be able to get the most fantastic interest rates available on plans.

However, that does not mean that you still can’t get an equity release. Some lenders will offer plans with the flexibility to help repay your existing debts. However, the interest rate on your loan will likely be in the highest bracket.

Age

Equity release plans are generally only available to those over 55. Suppose you’re over that age and eligible. In that case, you’ll see that interest rates can still vary, even though how old you are doesn’t directly impact the figure offered.

Interest rates vary more on how much you wish to borrow against your property value than your age. If it’s the maximum amount available you want to borrow, you’ll see a higher interest rate.

An example of this is below:

  • a 55-year-old could get a 4.45% (AER) wishing to release 25% of their property value
  • a 75-year-old could get a 3.67% (AER) for 25% of their property value

Marital Status

If you are married and want to take an equity release in a single name, you’ll find that your lender options may be limited. However, you can apply for a lifetime mortgage in one person with the youngest applicant in the marriage, where you may get a lower interest rate.

Requested Loan to Value

The requested loan to value (LTV) is arguably the most significant factor determining your interest rate. The amount you want to borrow as a percentage of your property means that your interest rate will increase as you veer towards the maximum amount.

Product Features

Equity release loans will have the option to tack on additional features such as a reserve facility or inheritance protection. Any extras placed on your lifetime mortgage will have a higher interest rate.

So considering these driving factors, what are the interest rates you’ll likely get when applying for an equity release?

How Are Equity Release Interest Rates Calculated?

We compare plans from the leading equity release providers

Everyone’s circumstances are different. However, we can set some examples to understand what interest rates you can achieve using typical application scenarios.

See the table below to get a more concise overview of interest rates.

See the table below to get a more concise overview of interest rates.

Person(s) Scenario Property Value Release Interest Rate
60-year-old single homeowner Unemployed and needs money for retirement £650,000 £52,945 upfront + £119,305 in reserve 3.12% MER (3.16% AER)
70 and 73-year-old couple The couple needs cash to repay a mortgage and car payments. They want to pay equity interest owed with the option to downsize and repay when the first borrower passes away. £575,000 £219,000 3.50% MER (3.56% AER)
77 and 79-year-old couple The couple wants to pay their existing mortgage and secured loans. £250,000 £123,750 + £6,188 cashback 5.60% MER (5.75% AER)

As you can see from the table, the age of the person and the amount requested LTV has the most significant impact on the equity release interest rate. But with all considered, what’s the best equity interest rate you can get right now?

What is the Best Equity Interest Rate?

Currently, the best equity interest rate is 3.53% (AER) as of 2022 at a fixed rate for life. The average for this year is 4.33%, rising against previous years but still significantly lower than a few years ago.

The highest interest rate found on the market is 7.10% (AER) for comparative purposes.

What are the Current Equity Interest Rates?

Given the vast array of determining factors, getting a comprehensive picture of current equity interest rates can be challenging. However, it’s possible to present an idea of the best current rates with a particular scenario.

Below are some of the best current rates by prominent providers with the circumstances of being a single, 60-year-old homeowner releasing 10% of a £300,000 property value.

Provider MER AER APR
Canada Life 3.92% 3.99% 4.10%
Legal & General 3.80% 3.87% 3.90%
Pure Retirement 3.77% 3.84% 3.84%

What Do AER and MER Mean?

When researching quotes, you will stumble across the terms AER and MER next to the figures on interest rates. You may wonder what those initials mean and why they matter.

  • AER is the Annual Equivalent Rate, which is the amount of interest added over one year
  • MER is the Monthly Equivalent Rate, where the yearly interest gets divided every month

The two may seem similar in purpose, but why do the differences matter?

What’s the Difference Between AER and MER?

There is a difference because you generally will not make any monthly repayments when you take out a lifetime mortgage. Interest will be charged monthly based on the preceding month’s closing balance.

MER is the fixed interest rate charged on a loan, whereas the AER is the interest rate that accounts for the entire year. A small example of applied MER at 2.63% is below. The recurring monthly interest charges would see the AER become 2.66%.

Month Opening Balance Interest Charged Closing Balance
1 £10,000.00 £21.92 £10,021.92
2 £10,021.92 £21.96 £10,043.88
3 £10,043.88 £22.01 £10,065.89

It’s imperative to compare the same interest rates (MER or AER) to get an accurate picture of the best plans.

What are Fixed and Variable Interest Rates on a Lifetime Mortgage?

Another term you’ll see when comparing equity release interest rates is fixed and variable. Let’s break down these terms and how they apply to lifetime mortgages.

Fixed Interest Rates

Fixed interest rates are precisely how they sound. The interest rate charged stays the same throughout the plan. It is not subject to any rises, giving the loan applicant a more concise idea of how interest will get charged.

Variable Interest Rates

Variable interest rates are subject to adjustments according to the Consumer Price Index. That means rates can be higher or lower depending on the CPI displayed on the Office of National Statistics (ONS) website.

These interest rates are often capped with Equity Release Council rules to give lifetime mortgage applicants certainty. Consumers can benefit from lower interest rates, but they do not offer the same certainty as those plans with fixed rates.

It’s a way to reduce the interest rate potentially, but it’s not a guaranteed way to pay less interest. But with that said, are there any ways to reduce the interest paid on an equity release plan?

How Do I Reduce the Amount of Interest Paid on an Equity Release Plan?

Reducing interest rates on your equity release may seem far-fetched, but it is entirely possible. Find below some methods to bring down the interest you could potentially pay on a lifetime mortgage.

Drawdown Reserve

Opting for a drawdown reserve is where you’ll store cash in a reserve facility, withdrawing the money as needed rather than taking it all at once. This feature can help reduce interest rates as you’ll only pay interest on the money you start.

Monthly Interest Repayments

Another way to lower the rates is to clear the interest balance on your equity release by paying the interest every month. Usually, lifetime mortgages do not require you to make monthly payments, but opting to do so can stop the interest from compounding and force a higher balance.

The Equity Release Council now has a rule in force that all plans must come with the option of monthly interest repayments, where plan holders can opt-in and out as they see fit.

Loan Repayments

New Equity Release Council rules offer holders a guaranteed option to pay between 10% to 40% of their total loan amount annually. Paying off segments of your lifetime mortgage will significantly reduce the amount of interest.

Downsizing

Opting for downsizing protection can guard your loan against penalties should you move home, and the new property doesn’t satisfy requirements. This method dictates that all balances, including loans and interest, get covered in the home sale.

So finally, equity release interest rates can be a topic that requires a bit of thought. Everybody has some questions they want quick answers to, so we’ll cover the most typically asked questions about equity release interest rates below.

Frequently Asked Questions About Equity Release Interest Rates

Here are some of the most frequently asked questions about equity release interest rates.

Are My Equity Release Interest Rates Fixed for a Lifetime?

If you agree on a fixed interest rate with your equity release plan, that rate will not change. Should you have opted for the variable rate, these are subject to change in line with the CPI, but they get capped at a limit.

Does Equity Release Mean Compound Interest?

The core definition of compound interest is paying interest on top of the interest you’ve already accrued. Lifetime mortgages will see you paying compound interest unless you opt to clear the interest balance monthly.

Are My Equity Release Interest Rates Affected by Bad Credit?

The typical train of thought is that bad credit affects all financial products. However, it’s not common to find that your interest rates get affected by poor credit history, considering the loan is against a percentage of your home’s value.

Will Equity Release Interest Rates Ever Fall?

While it’s not specific that equity interest rates will fall, experts agree that this is prone to happen. They predict that rates will fall in 2024.

What Interest Rate Can I Expect When Comparing Quotes?

Various factors will determine your equity release interest rate when researching plans. You can expect your interest rates to be anywhere between the lowest of 3.53% and the highest of 7.1%.

Does the Lifetime Mortgage Mean I Don’t Have to Pay Interest?

Taking out a lifetime mortgage means you don’t have to make any repayments. The interest and loan will get paid from the sale of your property if you pass away or go into long term care.

Is There an Option to Make Interest Repayments?

New Equity Release Council rules force plans to include the ability to make interest repayments. You can stop and start these as you wish, where the remaining balance gets recouped from the sale of your property.