Can Equity Release be Paid Off Early?
A lifetime mortgage is a long term commitment and is not intended to be paid off early. You may be concerned that by taking on a Lifetime Mortgage will leave you with debt for the rest of your life, it’s very common for people to ask, can equity release be paid off early?
Yes, you can pay back equity release early and you can make partial or full repayment whenever you like. However, It’s important to note that Early Repayment Charges may apply.
The ways in which charges are applied
What are Early Repayment Charges (ERC’s) on equity release?
When you release equity with a Lifetime Mortgage and look to repay the loan over and above the agreed terms you may incur an early repayment charge for paying back some or all of the money you’ve borrowed before a certain date or event.
There are two types early repayment charges:
- Fixed rate early repayment charges
- Variable rate early repayment charges
There are pros and cons to each.
You may be interested in Types of UK Equity Release schemes
Equity release plans with Fixed-Rate ERC’s
Equity release plans with fixed rate ERC’s offer the security of knowing exactly what a penalty charge will be before you enter the agreement. Details can be found in your Key Facts Illustration and lifetime mortgage offer.
The table below illustrates how different providers offer different plans with different fixed rate ERC’s
|Years||More 2 life||Pure Retirement||LV||Standard Life|
|Capital Choice Ultra Lite||Sovereign A||Drawdown & Lite||Horizon 300|
The equity release market is constantly changing and we make every effort to make sure information is timely and correct. Above is correct as of March 22
It’s common for providers to offer additional incentives with their lifetime mortgages, here’s what More 2 Life has to say:
More 2 Life Says this about their Capital Choice Ultra Lite Plan
A generous free valuation is offered along with a fixed equity release lifetime interest rate on the initial lump sum. More2Life now bring fixed early repayment charges to their Capital Choice Ultra Lite plan which are 5% for 5 years, 3% for the next 5 years & none thereafter.
An additional and valuable feature that the More2Life Capital Choice Ultra-Lite plan offers is the downsizing protection feature, which allows anyone moving home after 5 years to repay the loan in full with NO penalty.
With variable rate ERC’s the penalty charge will constantly differ depending on a number of factors. The lowest charge can be 0% and there is a maximum charge of 25% is set by the Equity Release Council, However, the maximum and minimum charge you’ll pay will be written into your lifetime mortgage terms and conditions.
Variable rate ERC’s are calculated using a ‘Variable gilt index ERC’. A gilt is a kind of government security and the charge payable is calculated based on:
- The size of your lifetime mortgage
- The estimated term of your lifetime mortgage
- Movement in the level of long-term interest rates
The provider will want to protect themselves from financial loss, so when conducting the calculation if they deem that no loss will be incurred then they may be no charge other than administration.
If you are considering paying off your lifetime mortgage it’s well worth getting equity release advice to make sure you get the best product for your specific needs and circumstances.
ERC’s on Initial Borrowing vs Balance
When comparing options, keep in mind that some lenders base ERCs on the original loan amount, while others base them on the current balance. Depending on when you pay, this might have a major influence on the ERC charged.
Take Mr Jones for example, if he borrowed £150,000 at 4% AER, the amount owed after six years has grown to £212,777
Incurring an ERC charge of 6% of the initial borrowing, the highest ERC is £9,000
Incurring an ERC charge of 6% on the balance owed is £12,766
If you’re considering paying off your equity release early, speak to us for equity release advice and make sure you get the plan that best suits your needs
How to find out how much any Early Repayment Charge (ERC) will be
The best way to find out how much an ERC will cost you is by checking your legal documentation, or you can contact the provider directly.
Once you can see how the charges are applied, you’ll be able to work out what charges are coming up, if you do struggle with this you can always speak to your financial adviser who should help clear things up for you
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How to make partial repayments towards your Equity Release plan
Many plans allow free partial repayments up to a certain percentage of the borrowed amount. Typically up to 10% per year, though some plans allow up to 12% and others up to 40%. They allow you to pay none, some, or all of the plan’s interest. You can also pay more than the interest charged to reduce the capital owed and save money at the end of the plan.
Here is an example of what would happen to your balance owed on £150,000 at 6% AER if you made 10% payments, no payments or if the interest was 0%.
Circumstances in which Early Repayment Charges (ERC’s) do not apply
Many lenders allow partial payments without incurring ERCs. They’re normally informal and allow you to make payments as and when you want. Some lenders allow up to 10% annual payback, while others allow up to 20% or 40%.
But that’s not all. Some lenders enable limitless payments right away. Other lenders impose a limit payment frequency and a minimum plan duration.
Porting your plan when moving property
Lifetime mortgages that meet ERC standards are transferable. This means you can move your lifetime mortgage to a new property if it meets your lender’s criteria.
When you sell your home, you can use the proceeds to repay your equity release in full. You may be charged an early repayment fee.
Moving doesn’t always mean paying back your plan in full. Instead, you can transfer your existing plan. All Equity Release Council lenders allow this as long as the new property meets their lending criteria.
Equity Release plans with downsizing protection allow you to repay when you move without penalty.
But not all downsizing safeguards are equal. Some waive early repayment fees simply by selling your home, while others do so only if your new home isn’t one that the lender will loan on.
Equity release makes property underwriting more flexible. However, some properties are still unacceptable to most lenders. Homes for the elderly, ex-local authority flats, freehold and short leases.
If the property is acceptable, you can transfer your equity release plan. It’s possible that you’ll have to pay back some of the loan if you move.
Significant life event exemption
The significant life event exemption is a great benefit for all joint lifetime mortgages. With a significant life event exemption, you can repay your equity release balance if the first borrower dies or enters long-term care.
You may also plan to repay after the first co-death. owner’s Many couples want to stay in their home while they are both there, but the surviving co-owner does not want or can afford to stay alone.
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