WITH equity release, you are not required to make regular repayments.
Instead, the amount borrowed, plus any accrued interest, is repaid when you die or move into long-term care. But is there a way you can pay back equity release early?
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The most common form of equity release is a lifetime mortgage which is a loan secured against your property.
Your lender will determine how much you can borrow based on the value of your home among other factors such as age, whether you’re a joint or single applicant, and what you require the money for.
This type of lending is only available to homeowners from the age of 55, and it’s often used as a financing option in retirement.
Your money can then be given in one lump sum or smaller amounts over time, known as drawdown, – but regardless of your choice, it’s tax-free.
Once you’ve repaid any existing outstanding mortgage, which is a condition of equity release, the money is yours to enjoy spending.
If you decide to take out a lifetime mortgage, you’ll be given the option to pay back the interest and in some cases part of the loan, but this is subject to certain limits and early repayment charges may apply above a set value.
This means you can choose not to make payments if you wish and, unlike a traditional loan secured against the property, your home won’t be repossessed.
While these traits make it a viable form of borrowing for some homeowners, there are a few things to consider.
Mainly, if you decide not to make repayments the interest you owe will compound.
The other form of equity release is a home reversion plan, which involves selling part of your home in return for a lump sum or series of payments.
You can continue living in your home, typically rent-free, until you die or move into long-term care.
At this point, the property is sold and the proceeds from the sale are used to repay the plan provider for their share.
Any remaining proceeds from the sale, if applicable, are distributed as a part of your estate.
Unlike lifetime mortgages, home reversion plans do not accrue interest.
However, the plan provider won’t make a full-market offer for the percentage of your home that they buy.
Both a lifetime mortgage and home reversion plan will reduce the value of your estate and impact funding long-term care.
How can you pay back a lifetime mortgage?
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You can start making repayments on your lifetime mortgage arrangement once it begins.
However, how much you can repay without incurring a penalty depends on your agreement and lender.
If your main goal is to keep your loan as cheap as possible, then these are your options:
Making repayments
While you have the flexibility to make repayments at your own pace, it’s important to keep in mind that this may come with some added costs.
If you choose to not make interest repayments, that debt will compound, meaning that interest will be applied to the interest and the amount outstanding will grow more quickly.
So, if you want to prevent the roll-up of interest, you may decide to repay the interest before it compounds. In instances where you can’t, even repaying some of the money that month can make a difference.
Overpay your loan
If you find yourself with a surplus of cash, there are plans that may allow you to make overpayments on your lifetime mortgage.
Reducing the amount outstanding will reduce the interest that accrues but make sure you know the terms of your plan as lifetime mortgage providers typically limit the amount you can pay before they begin charging early repayment fees.
All new plans which meet the Equity Release Council standards must allow penalty free payments, subject to lending criteria.
To protect the interests of equity release borrowers, this industry body sets an additional set of rules all providers who are members must adhere to.
For example, this includes the no-negative equity guarantee – which means that your estate will never owe more than your property is worth when it is sold.
It’s important to note that plans from providers who are not part of the Equity Release Council do not have these requirements.
Repay the entire loan
If you’re looking to exit from your equity release agreement in its entirety, then some providers allow you to repay your loan before you die or move into long-term care.
But, this usually comes with an early repayment charge which is set out in your agreement.
Early repayment charges are set differently depending on your lender and could include:
- Fixed charge – Where your lender states exactly how much the penalty will be for exiting the agreement. While your charges won’t increase, it could lessen if it’s based on a sliding scale. Often lenders reduce their fixed charges over time. So the longer you’ve had equity release, the less you need to pay in exit charges.
- Variable early repayment charge – Where your exit charges fluctuate. In this instance, these early repayment charges will typically be linked to the price of UK government bonds.
Some lenders calculate your early repayment charges on the original capital borrowed, while others base it on your remaining balance.
Dangers of equity release
EQUITY release can be a good way to unlock cash in retirement – but there are some dangers to consider, according to The Sun’s Tara Evans.
Interest rates on lifetime mortgages are around 5.5%, with some topping 8%. This means they can be more expensive than a traditional mortgage and you should always consider downsizing first.
You could end up owing more than you borrowed, although it will never be more than the value of your home.
Using equity release to take cash from your home will reduce the assets you have to pass on to loved ones when you die.
It is a long-term commitment and you may be charged an early redemption fee that can be as high as 25% if you want to pay it off.
Be aware that equity release could affect or stop your benefits.
Always seek advice from a qualified equity release adviser.
Will I face early repayment charges?
You can expect to face early repayment charges if you want to overpay more than your equity release provider allows or if you wish to pay off the loan altogether.
However, exit fees can be hefty. It could cost thousands of pounds in fees to exit your agreement, and for some, it may be cheaper to keep servicing their interest repayments.
So if you’re looking to end your agreement, it’s best to get in touch with a financial adviser to evaluate your options.
Can you get equity release with no early repayment charges?
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Of course, there are some instances where you don’t need to pay an early repayment charge. These include:
Moving home
All plans that meet the standards of the Equity Release Council give you the right to move home, but it does come with a caveat.
Your lender must be willing to accept your new home as security for your loan based on certain criteria such as property type, condition and value.
As with any move, you can expect valuation and legal fees to apply and if your new property is of lower value, you might need to repay a portion of the mortgage to maintain the lender’s security.
Downsizing
In the instance where you move to a smaller home that’s less valuable, you’ll be downsizing.
Equity release lenders treat downsizing differently to moving home. That’s because if the new property is worth less, then they could receive a shortfall from the agreement.
In these situations you’re allowed to pay off some of the loan without facing an early repayment charge if your arrangement includes a downsizing protection clause.
If not, then check with your lender to understand what will be payable – or seek the advice of a financial advisor to see what options are available.
If your spouse dies or moves into long-term care
Also known as a “compassionate window” or “significant life event exception”, some equity release providers enable a clause called the “compassionate repayment feature”.
If you have a joint lifetime mortgage, this feature allows you to repay the loan penalty-free if your spouse or civil partner moves into long-term care or dies.
This typically applies for up to three years following the significant life event.
Unlike the rules set out by the Equity Release Council, this isn’t something all lenders need to adhere to – so it’s worth checking if your agreement has this feature in place.
As advice is required before proceeding with equity release, Age Partnership can help you find out more and if it could be right for your circumstances.
Through their service, initial advice is provided for free and without obligation.
Only if your case completes would an advice fee of £1,895 be payable. Other lender and solicitor fees may apply.
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Age Partnership is a trading name of Age Partnership Limited, which is authorised and regulated by the Financial Conduct Authority.FCA registered number 425432. Company registered in England and
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