One question becoming more widespread as prospective borrowers seek equity release plans is whether you can make repayments on the schemes. There are many benefits to taking out a dream. However, some remain concerned about leaving an outstanding balance after passing away.
This guide will inform whether it’s possible to repay equity release early, how you can do it, and the potential penalties. First, let’s begin with why borrowers want to make early repayments on their plans.
The general driving factor of taking out a lifetime mortgage is to unlock equity in your home to finance retirement or assist with estate planning. Lenders do not require you to make repayments while you’re alive – so why would you want to make early repayments?
One of the main reasons is that finance isn’t always predictable. There may be an instance where you come into some money through various means, rendering the equity release loan not as necessary as it was before.
However, the most prominent reason borrowers want to make early repayments is to reduce the amount of debt on the equity release plan to as little as possible. As the lifetime mortgage continually accrues interest until the house gets sold, the balance owed may consume the entirety of the proceeds.
Should a borrower wish to have money left over to pass to the family, that scenario is not ideal. It’s a sticking point for those wishing to leverage the benefits of equity release but ensure that debt is at a minimum.
So is it possible to pay the equity release loan back early?
Finding a concise answer about paying back equity release earlier than the agreed term seems challenging for those weighing up whether the loan is a good idea. That’s mainly because this type of loan has been a bit of a grey area in terms of early repayments, but why specifically equity release?
As the plan name suggests, the popular lifetime mortgage scheme has features that release equity to cover the rest of your life. There isn’t much expectation that the borrower will make repayments while still alive, where the original sum and interest will get paid once the house gets sold.
But the bottom line is yes, you can pay back equity release early, under certain conditions.
Traditionally, there are hefty penalties in early repayment charges (ERCs). Although the equity release market is more competitive today, lenders may offer plans that don’t go hard and heavy on the ERCs.
Some will even offer alternative financial plans should early repayments be a concern. But suppose equity release suits your long-term financial future. In that case, you may want to understand how early repayments work before committing to the scheme.
We compare plans from the leading equity release providers
The consensus around early repayments is, “why am I being charged for giving back borrowed money early?”. The concept may seem trivial because you start to give back a significant amount of money before it gets missed, but the reality is not as straightforward.
When you take out a lifetime mortgage, there’s an expectation that you’ll only repay the debt on two life conditions:
Once those events occur, the debt from the original sum and accrued interest will settle through your home’s sale. The lender will make calculations of your interest rates and details of your equity released based on the above principles, creating a contract that works for both lender and borrower.
If you repay your lifetime mortgage early impacts the lender, who integrated the details of your contract based on those two life events. Changing the circumstances means that the money they borrowed to lend you could see a compromised lending agreement. That means it would cost them to change the conditions of your contract.
In part, lenders have historically discouraged early repayments, but that doesn’t mean you can’t make early repayments. Today’s equity release markets call for more flexibility. The Equity Release Council has implemented rules that must allow borrowers to make early repayments.
Lenders will allow these early repayments in the form of ERCs.
It’s vital to note that the borrower can make repayments towards an equity release plan or pay it off. However, doing so may incur early repayment charges.
These fees are additional charges the lender adds to your repayments to cover any losses experienced by the lender for going outside your agreed contract. Lenders will vary in how they apply ERCs. However, the types can generally get broken down into two categories, fixed and variable repayment charges.
We’ll explain both in more detail below.
Fixed ERCs are the most straightforward to understand as you’ll know what you pay should you make any early repayment. The fee gets levied on top of the compensation as either a fixed figure or a fixed percentage.
Many lenders will hover around the 5% fixed percentage mark of the amount repaid. However, the numbers can vary depending on equity release agreements.
Variable ERCs are more complicated as you won’t know how much you’ll have to pay until you make the early repayment. There will be a cap on how much they can charge (25% as per Equity Release Council rules). However, it will fluctuate depending on gilt redemption yields between your lifetime mortgage approval and the date you get a quote for repayment.
A gilt is government security on a particular loan. In the instance of a lifetime mortgage, a specific one gets chosen to reflect an expected term. You will be subject to an ERC if the gilt yield is lower on the date quoted for early repayment than the lifetime mortgage completion. However, if it’s a lower yield, you potentially won’t get charged any ERCs.
There’s a chance that no ERCs will apply on early repayments. However, there’s also a possibility you could get charged for more than the interest already accrued.
So are there any circumstances where there are guaranteed zero early repayment charges?
When ERCs don’t apply to equity release, the most prominent circumstance is when one of the two life events triggers. Should the last borrower of the household pass away or move into long-term care, the sold property pays off the balance and interest on the loan without additional charges.
However, it’s more likely you’ll want to know if there are any circumstances where ERCs don’t apply should you wish to make an early repayment. Some plans will offer exemptions or clauses in contracts that allow partial payments without penalty.
You can find out more about these potential exemptions below.
More plans get offered in the equity release market that informally allows borrowers to make early repayments. Most will let up to 10% annually without penalty. However, some lenders will allow up to 40% on the balance as the market gets competitive.
Most lenders will limit the number of payments you can make and give a minimum time for the plan to run until you can make repayments. But now, you’ll even find some lenders who will allow an unlimited number of payments.
Checking for overpayment exemptions from ERCs is worth researching when comparing equity release plans.
Because all reputable equity release plans follow Equity Release Council rules, you’ll have an assurance that they meet specific guidelines. One of those standards is that lifetime mortgages are transferrable to another property. However, some lender policies may apply to the transfer.
The home sale can pay back the full equity release loan if you move property, though it may be subject to ERCs. But plans should have a clause that allows a porting of your existing agreement to a new property if it satisfies lender criteria.
One hurdle could be that the new property has a significantly lower value than your current one. The lender will request that you repay a part of the current lifetime mortgage balance in that scenario.
If the home has more value than the new one, the proceeds should cover the partial amount required.
The final exemption is arguably one of the most intriguing for prospective borrowers. Downsizing protection is a feature most lenders offer as a clause to pay back your equity release early without incurring any penalties.
The description of this exemption lives by its name, offering borrowers the prospecting of ‘downsizing’ properties. This feature is when you move into a home with less value, using the sale of your current home’s proceeds to pay back the equity release in its entirety without ERCs.
Many considering downsizing protection ask, “what if we decide to move into a property with higher value?”. Different lenders have varying policies about ‘upsizing’, but most will allow it under certain conditions.
Borrowers should research lenders carefully and check their downsizing protection policies should a larger home potentially be on the cards.
Equity Release Council rules state that lenders must now allow repayment options with every plan. Potentially borrowers will find that most schemes give a choice of voluntary repayments of up to 10% per year. However, some will offer as much as 40%.
The lender will use an equity release repayment calculator to recommend a repayment rate based on the borrower’s income, where payments are voluntary. You don’t need to arrange for regular repayments, and these instalments can cease.
The reason borrowers seek the option of repayments with their equity release plans is the concern of accumulating interest that reaches the property’s value. Many take out a lifetime mortgage to plan finances more effectively, including leaving money for their loved ones.
Borrowers may want to pay the loan back to rest assured that there will be money left over from the sale of the home post-passing.
Yes, paying your equity release plan in full is possible, though it may be subject to some ERCs depending on the lender. So what happens if you do manage to pay your lifetime mortgage or reversion scheme before the typical two life events have occurred?
There’s no more debt to pay, considering the clearance of the outstanding balance. The original agreement is that repayment comes in your house selling. However, you will retain 100% of the property as the equity release loan no longer holds partial value as security.
You’ll be able to pass property down to loved ones and potentially see your inheritance tax threshold rise by £150,000.
There are often multitudinous reasons why borrowers might get concerned about the sale of their property after passing. The most sticking is that there could be emotional attachments to your home where your beneficiaries might want to retain the asset.
No matter what type of plan you have, most lenders will give options to keep your property after death. That’s pending that they can pay the outstanding balance on the equity release loan. The beneficiaries can deliver out of their pockets, sell other assets, or refinance the property to cover the debt.
Finally, with all the options and features lifetime mortgages include in the current market, prospective borrowers may question whether repayments are necessary. Or if the lender could ask for the money back early should the financial world face turbulence.
The answer is straightforward – no, you will not have to make any repayments on your lifetime mortgage while you’re alive. Equity Release Council rules state that the lender cannot ask for the money back early at any time or under any circumstances.
No matter what happens, you can remain in your home, and nothing changes regarding the ultimate repayment of your equity release plan.