What interest rate can I achieve on my equity release?

The lowest Equity Release interest rate is currently 5.79% (MER) fixed for life. The highest interest rate in the market is 8.89% (MER). In the Autumn 2023 Market Report, the Equity Release Council stated that average interest rates for lump sum Equity Release were 6.66% and 6.28% for drawdown lifetime mortgages.

In this guide, you will learn:

• What are the current Release Interest rates?
• What interest rate am I likely to achieve?
• What affects the interest rate charged?
• AER vs MER – what's the difference?
• Fixed vs variable interest rates
• How interest rates have changed over time

What are the current Release Interest rates?

Our general rule is an interest rate at 5% excellent, 6% being average, and 7% plus being for more substantial borrowing with the most product features.

Let's take a look at a selection of some of the lowest interest rate products on the market:

Lender	Monthly Equivalent Rate (MER)	Annual Equivalent Rate (AER)
LV	5.79%	5.95%
More2Life	5.82%	5.98%
Pure Retirement	5.82%	5.98%

What interest rate am I likely to achieve?

The interest rate for your plan will have many determining factors, some of which we will explore later in this article.

While everyone's circumstances are different, we have compiled examples of clients we have helped and listed the interest rates applicable to their plans.

To receive your personalised illustration, click here to request a quote.

What affects the interest rate charged?

There are many factors which contribute to the interest rate for your lifetime mortgage. These include:

Requested Loan to Value

The most significant impact on your interest rate is the amounts you require to borrow as a percentage of your property. Generally, the closer to the maximum available to you which you wish to release, the higher the interest rate.

Credit History

Your credit history can also affect the plans available and subsequent interest rates. If you have had County Court Judgments (CCJs) issued against you, or you have been made insolvent in the past, you can still get equity release. However, some plans with the best interest rates in the market may not be available.

Even if you currently have outstanding credit problems, you could still get Equity Release. Some lenders also offer the flexibility of allowing you to use the Equity Release to repay these debts.

Product features

All lenders have different product underwriting and various features on their plans. Products which have extra features, such as a reserve facility or inheritance protection, may mean you have to pay a premium for this with a higher interest rate.

Lending criteria can also have an impact on limiting the market for you. For example, if the lenders offering the best interest rate products don't approve of your property, you will have to choose a lender who will, which could be at a higher interest rate.

Some lenders also charge extra fees such as completion fees which are going to affect the interest rate. It is essential to understand the total cost of the plan over the estimated term, as sometimes plans with lower interest rates include other fees which may make the plan more expensive.

Age

Although your age doesn't directly affect the interest rate, it does affect the maximum amount you can borrow. This, in turn, affects the interest rate, as typically the closer you are borrowing to the maximum amount available, the higher the interest rate.

Let's look at an example:

Marital Status

Some lenders won't be available to you if you are married and want to take Equity Release in one name only. To have access to all plans, you would need to own and apply, in joint names.

Remember, lenders, use the age of the youngest applicant when working out how much you can borrow, and your associated interest rate. It may be that you could have a lower interest rate, or a more significant release by applying in one name.

AER vs MER – what's the difference?

When looking at Equity Release interest rates, you will notice some quoted as MER and others as AER.

But what's the difference?

AER stands for the Annual Equivalent Rate.

AER represents the rate of interest added over one year.

MER stands for the Monthly Equivalent Rate.

MER represents the rate of interest added over the year but divided over every month. The MER is often slightly lower than the AER.

Let's see why.

Lifetime mortgages usually do not require you to make any monthly payments. Commonly interest is calculated and added to the loan monthly, and if you are not making any payments, as the months' pass, your loan balance increases slightly more each month.

The table below illustrates how interest added monthly at an MER of 5.94% becomes an AER of 6.10%% at the end of the year if you make no payments. (Monthly interest added = AER / 12).

Month	Opening Balance	Interest Charged	Closing Balance
1	£10,000.00	£49.50	£10,049.50
2	£10,049.50	£49.75	£10,099.25
3	£10,099.25	£49.99	£10,149.24
4	£10,149.24	£50.24	£10,199.48
5	£10,199.48	£50.49	£10,249.97
6	£10,249.97	£50.74	£10,300.71
7	£10,300.71	£50.99	£10,351.70
8	£10,351.70	£51.24	£10,402.94
9	£10,402.94	£51.49	£10,454.43
10	£10,454.43	£51.75	£10,506.18
11	£10,506.18	£52.01	£10,558.19
12	£10,558.19	£52.26	£10,610.45

If you are comparing any interest rates, it's essential to make sure you are comparing the same type to make sure it's an accurate comparison.

Fixed vs variable interest rates

The majority of lifetime mortgage interest rates are fixed for life at the outset of the plan. This means you know exactly how interest is charged for the entire length of the plan, and you are not 'stung' if interest rates increase.

Variable rates for lifetime mortgages are similar to residential mortgages. Typically with lifetime mortgages, they are linked to the Consumer Price Index.

A lender who offers variable rate equity release is One Family, who states:

"Our variable rate lifetime mortgages are linked to the Consumer Price Index (CPI) and the CPI is adjusted each year in December according to the CPI displayed on the Office of National Statistics (ONS) website."

A two year fixed rate is currently available with One Family, following which the rate changes as per the link to the Consumer Price Index (CPI).

One of the Equity Release Council's rules is that for a plan to meet standards, all variable rates must have an upper cap to them. This offers a degree of certainty, as you know what the highest interest rate can be.

In recent times, we have mostly been recommending fixed interest rate products as these have often been lower than the variable rate plans, and offer complete certainty.

How interest rates have changed over time

Lifetime mortgage interest rates fell to an all-time low following Covid; however, they have since largely normalised.

Here's a table showing how average lifetime mortgage interest rates have changed since 2015.

Period	Average Interest Rate
Jul-15	5.97%
Jan-16	6.20%
Jul-16	5.96%
Jan-17	5.45%
Jul-17	5.27%
Jan-18	5.14%
Jul-18	5.22%
Jan-19	5.21%
Jul-19	4.91%
Jan-20	4.48%
Jul-20	4.11%
Jan-21	3.95%
Jul-21	4.26%
Jan-22	4.16%
Aug-22	5.74%

Let's look at a graph from a report produced by the Equity Release Council which shows how average equity release interest rates have changed over the last couple of years.

While a qualified equity release advisor has written this guide, it is not intended to be used as financial and should not be relied upon.

Equity release is not right for everyone and may involve a lifetime mortgage or home reversion plan.

If you are considering Equity Release we recommend you read through is equity release right for me? carefully.

We have also created a Myth Buster for further useful reading.

Equity release can impact your entitlement to mean tested benefits and will impact the value of your estate.

To understand the full features and risks of an Equity Release plan, ask for a personalised illustration.