Costs

Even though the idea is to free money up to use, there can also be high costs involved with equity release products. Before you sign anything, make sure you understand what a product might cost you in total dollars. Don't be put off by anyone who says it's too difficult to work out, or that no one really knows how long you (and your partner, if you have one) will live. Use averages to get an idea of what's involved - any good provider will be able to help you with this.

Our Provider Checklist includes a table that will help you calculate the costs involved. Ask your provider to complete this table, and have them answer the other questions on the checklist as well.

Let's take a look at the money involved when considering an equity release product:

• Interest rates
• Fees

Interest rates

Equity release products usually charge a higher interest rate than normal loans on property. That's because the provider has to pay interest on its own borrowings, but doesn't receive regular interest payments from you.

There might also be a slightly higher risk of default on an equity release product, or the accumulating equity release amount could turn out to be more than the value of the property although current providers in New Zealand try to ensure that you will never owe more than the value of the property. They can't guarantee that, however.

A higher than "normal" interest rate can build up very quickly, as this table shows:

Note: at the time this table was updated (October 2007),  a 'normal' long-term loan, with interest fixed for five years, cost about 8.6% a year.

Towards the end of the equity release period, the build-up could look quite alarming, so it's vital to know what might happen before you commit to the equity release. Growth in property values can help offset this effect, but you should use conservative assumptions on expected property growth when considering whether to commit to equity release.

Interest rate changes

Just as you have to consider interest rate changes when you're getting an ordinary house mortgage, you also have to take them into account with equity release products.

Is the interest rate fixed or floating?

If it's fixed, is it fixed for the life of the loan or may it change before then? If it is fixed and you repay early there could be break penalties especially if variable rates reduce going forward. Ask if that's the case.

If it is variable, is there a published basis on which the rate is set (such as "pegged at 1.5% above average floating rates")? It may be better if there is a clearly explained basis on which the rate is set - that way, the rate can still change but the basis can't. Against this however, the market is likely to become more competitive and market rates may well be lower than a pegged rate. You get some certainty but you may end up paying more.

Is the variable interest rate capped so that the interest rate cannot exceed the cap rate that is agreed with you?

Whether a fixed, variable or capped interest rate will result in the greatest amount of equity remaining in your house when the loan is due for repayment is unknown. The result will depend on how long you live, economic conditions, changes in interest rates and property growth rates over the whole life of the loan.

Small differences in interest rates can make a big difference over the expected term of an equity release product as this table shows:

 Note: This table was updated in October 2007.

Fees

As well as interest charges, there are several other costs you will be liable for when you get an equity release product. It's also important to find out whether the provider has the right to change the fees they charge for future services such as extra draw-downs or termination.

Here are some of the fees you might be expected to pay:

Valuation fee

The provider will probably want to know what your property is worth. You may have to pay for this valuation. You might also need to pay a fee every few years to check on the changing value. Find out if this applies to the equity release product you're considering.

Application fee

The provider may charge a 'placement', 'arrangement' or 'application' fee. This could be a dollar amount or a percentage of the amount borrowed, such as 1% - though there are cases where it is as high as 4%.

Commission

Don't expect to get good advice for nothing; equally, you should not need to pay for advice you don't need. An adviser will be paid commission for selling you an equity release product. Find out how much commission the adviser is getting (from you and the equity release provider - yes, ask about that as well because you pay for it all in the end!) when you agree to take the equity release product. The adviser's commission will be included in the fees that the equity release provider charges. Find out what this is in dollars, not as a percentage.

Legal fees

Your lawyer will charge fees for the legal document that sets out the terms and conditions of the equity release product. You may have to pay the provider's legal fees as well - be sure to ask the provider about this. You can probably expect to pay fees of $500-700 plus expenses of, perhaps, another $150. Lawyers who are familiar with the product may charge less so certainly shop around.

Early repayment fee

You may have to pay a specific charge if you repay the loan early. Ask your provider if they charge an early repayment fee or 'break' charges.

Administration fees

There could be charges for administrative 'housework' during the loan. This might include varying the terms, replacing a property or discharging a borrower (on separation or death). You may be asked to pay extra fees for further draw-downs.

Buying and selling

If you release equity from the value of your home, you may find there are extra costs when you sell that home and buy another one - this is because of the costs associated with transferring your mortgage.

Remember that life can spring surprises on you. You may have to move unexpectedly, just when you thought you were settled. So it's important to check that the equity release product you are considering can be readily transferred to another property if the need arises.

You might also have to pay back the loan connected with the equity release product as soon as you sell your house, which could reduce the amount you have to spend on your new home. Make sure you can transfer the equity release security when you sell your property and buy another. While you might want to repay the equity release amount, it's better if you have a choice about whether or not to do so.

If you're moving into a retirement village, you should also check whether the retirement village property itself can be mortgaged in the same way as your former home and whether you can transfer your equity release loan.

Take all of these considerations into account. It may be best for you not to use an equity release product until you're in the home in which you expect to live for the rest of your life - your 'final' home. Remember that with most products, it is not an all or nothing decision. You can borrow some now and leave more for later.