Is It Possible to Repay Equity Release in 2024?

Thinking About Repaying Your Equity Release Loan? Find Out About ERCs, Exemptions, Interest Rates, and Other Factors Before Paying Back Your Lifetime Mortgage…
  • Last Updated: 06 Feb 2024
  • Fact Checked
  • Our team recently fact checked this article for accuracy. However, things do change, so please do your own research.

Contributors:

Francis Hui

Key Takeaways

  • Repaying equity release, including lifetime mortgages, is possible but may incur early repayment charges (ERCs).
  • Equity release loans can be repaid early through monthly interest payments, partial capital repayments, or in full.
  • Early repayment charges vary depending on factors like fixed or variable rates, and some exemptions may apply.
  • If not repaid early, equity release loans are typically settled from the sale of the home upon the borrower's death or entry into long-term care.
  • Consider consulting a professional advisor for personalized advice on equity release repayment options and potential charges.

When the time comes to pay back equity release loans, many homeowners may find themselves feeling uncertain about the best course of action. 

A lifetime mortgage is a popular choice for older homeowners who want to access funds to make their retirement more comfortable, but if your circumstances were to change, would you be able to obtain out of your loan? 

The simple answer is yes, but you’ll need to know exactly how you’ll be affected by early repayment charges, as they can make paying back your lifetime mortgage early a very expensive exercise.

In This Article, You Will Discover:

    In this informative article, the Every Investor team will explore the various options available to UK homeowners seeking to repay their equity release loans. 

    Let's dive in and learn about the factors to consider when deciding whether to pay back equity release loans and regain full ownership of your property.

    What Is Equity Release?

    For those over 55, equity release is a means to unlock the financial value of their property.

    It's a strategic way to gain financial freedom, often used for debt consolidation or making significant lifestyle improvements.

    Equity release primarily consists of lifetime mortgages and home reversion plans.

    Lifetime mortgages let you take a loan against your home’s value, with repayment deferred until after your death.

    Home reversion involves selling a part of your home for a cash sum or an income stream, while continuing to reside there.

    Read More: Examples Of Equity Release

    Can I Repay My Equity Release?

    Yes, you can repay your equity release, but you may incur early repayment charges (ERCs) if you decide to pay your loan back before it reaches its natural end.

    However, exemptions available can mitigate these costs if you decide to go the early repayment route.

    Before making any decisions about equity release repayment, it's crucial to consult with a professional equity release advisor or broker who can help you assess your unique situation and the potential risks involved.

    Equity Release with Repayment Option

    Equity release with a repayment option is any lifetime mortgage since early 2022.

    You can voluntarily repay the monthly interest and a portion of the monthly interest, usually up to 10% annually.

    Can You Pay Back Equity Release Early & Can You Pay Off a Lifetime Mortgage Early?

    Yes, you can pay back equity release early and you can pay off a lifetime mortgage early because a lifetime mortgage is simply a type of equity release product.

    The lifetime mortgage is the most popular equity release product available on the UK market today.1

    As every homeowner's situation is different, it’s essential to obtain an equity release advisor or broker to evaluate your specific needs and goals when considering equity release repayment options. 

    How does it work?

    There are a few ways in which to repay your lifetime mortgage early, whether you’d like to pay back a portion of your debt or repay the loan in full. 

    Let’s take a quick look at your options.

    Paying Back the Interest 

    Paying back the interest on your lifetime mortgage is a good way to make sure your total debt doesn’t grow. 

    It’s increasingly common for lenders to allow monthly interest payments on lifetime mortgages, reducing the long-term impact of compound interest on the loan.

    If you choose to make interest repayments, your equity release plan will essentially become an interest-only mortgage.

    Your lender will base your monthly interest repayments on affordability. 

    Making Partial Repayments

    Making partial repayments of the capital portion of your lifetime mortgage will allow you to make more substantial inroads in clearing your equity release debt. 

    The Equity Release Council2 published its 5th product standard in March 2022, which states that borrowers have the right to make voluntary penalty-free payments on the initial amount borrowed on all new lifetime mortgages.3

    The percentage you can pay back may vary between lenders, and some may impose limits or additional fees.

    The industry standard’s 10% of the value of the loan per year, but some lenders may go as high as 40%.

    Paying Your Loan Back in Full 

    Paying your loan back in full could be an option if you have the financial means to do so. 

    It’s possible to pay back your equity release in full during your lifetime (as opposed to having your estate repay the debt once you’ve passed away).

    Why would you want to do that? 

    You may want to repay your lifetime mortgage if your personal needs or circumstances change. 

    If you downsize and cannot port your equity release to your new home, repaying your loan may be necessary, which could incur additional costs or fees.

    In this case, selling your home will usually enable you to cover your lifetime mortgage debt.

    But be careful

    Ensure you can afford your new home after using proceeds from selling your original home to repay your lifetime mortgage, as it could affect your financial stability..

    If Not, How Do I Repay an Equity Release Mortgage?

    If you don’t repay your equity release loan early, your plan will usually be repaid using the proceeds from the sale of your home when the last homeowner dies or goes into long-term care, provided you signed a joint agreement. 

    Any residual funds from the sale will go to your estate and eventually be paid to your heirs.

    There are differences in the repayment process depending on whether you’ve got a lifetime mortgage or a home reversion plan.

    Repaying a Lifetime Mortgage

    When it comes to repaying a lifetime mortgage, your executor or the person looking after your affairs will have to sell your home, usually within six to 12 months of your death or your going into care, in order to repay your lifetime mortgage.

    Repaying a Home Reversion Plan

    Repaying a home reversion plan works slightly differently because you’ll have sold a share of your property to a home reversion provider in exchange for a lump sum and the right to keep living in your home rent-free (or at a particular rental) for the rest of your life or until you go into care.

    When either of those two things happens, the home reversion provider will sell your house, take its portion of the proceeds, and pay the balance to your estate.

    What Happens When You Repay Your Equity Release Plan in Full?

    When you repay your equity release plan in full, you may have to pay early repayment charges (ERCs).4

    Equity release is inherently a long-term loan, and lenders calculate risks and potential returns accordingly. Therefore, repaying early may entail additional costs or penalties.

    What does that mean for me?

    If you’re planning to settle your equity release in full, you should discuss the most cost-effective options with your lender before you commit to repaying your loan.

    What Are the Early Repayment Charges (ERCs) on an Equity Release Plan?

    The early repayment charges (ERCs) on an equity release plan are the penalty fees you may have to pay your lender if you choose to pay back your mortgage early.

    These charges can be determined in a few different ways.

    Equity Release Plans With Fixed-Rate ERCs

    Equity release plans with fixed-rate ERCs provide exactly what they say on the tin, i.e. your ERCs will be fixed at a particular level. 

    The advantage of having fixed-rate ERCs on your equity release loan is that you’ll know exactly how much your penalties will be if you pay back your equity release early.

    You’ll be able to find an explanation of these charges in your Key Facts Illustration5 and your mortgage offer.

    Anything else?

    Fixed-rate ERCs are usually applicable for a shorter period than their variable counterparts.

    For example, they may only be in place for the first eight years of your mortgage.

    Variable-Rate ERCs on an Equity Release Plan

    When it comes to variable-rate ERCs on an equity release plan, things may seem less clear-cut.

    If the early repayment charges on your equity release loan are variable, they’re linked to gilt yields.

    What does that mean?

    Basically, if gilt yields have risen in the period between the date on which you took out your equity release plan and the date you repay your equity release plan, you won’t have to pay ERCs.6

    If gilt yields have fallen during that period, however, you’ll have to pay ERCs.

    Do Providers Base Their ERCs on Initial Borrowing or on My Balance?

    Providers can base their ERCs either on the initial amount you borrowed or on your balance when you want to repay the loan.

    How Do I Know If Equity Release Early Repayment Charges Will Apply?

    You’ll know if equity release ERCs will apply by talking to your lender, equity release broker, or advisor because there are certain circumstances where exemptions apply.

    Overpayments

    Borrowers can make voluntary annual repayments on their lifetime mortgage up to a specified percentage—without penalties.

    Porting to a New Home

    The Equity Release Council allows for your equity release plan to be transferred to a new property at no extra cost, provided your new property meets your provider’s criteria.

    Downsizing Protection

    If you’re moving and your new property doesn’t meet your lender’s criteria, your lender will only allow you to port your equity release if you pay off a large chunk of your lifetime mortgage.

    That would usually mean that you’ll have to pay early repayment charges.

    However, if your plan includes a feature known as downsizing protection, your lender will waive the ERCs if you repay your lifetime mortgage early.

    Significant Life Event Exemption

    It’s often the case that a partner or spouse can’t afford to or won’t want to remain in the family home when the first co-borrower dies or goes into care.

    Rather than penalising the remaining partner for wanting to repay the equity release loan early, a significant life event exemption may apply and the borrower won’t be liable for any ERCs.

    Common Questions

    Do I Need to Make Payments Towards My Equity Release Plan?

    Equity Release Repayment on Death: How Does It Work?

    What if My Beneficiaries Want to Keep My Property?

    Can You Get Equity Release With No Early Repayment Charges?

    How Much Interest Do You Pay Back on Equity Release?

    What’s the No Negative Equity Guarantee?

    Can You Be Refused Equity Release?

    In Conclusion

    The financial hit of early repayment charges is just one of the factors you’ll need to consider if you’re wondering if you should pay back your equity release early.

    There are some worthwhile benefits to repaying your loan, such as keeping a lid on the compound interest so there’ll be more in the pot for your heirs when your equity release comes to its natural end.

    If you’re considering your options, speak to a qualified equity release broker or advisor to determine the average fees for equity release repayment, and ask whether you can pay back your equity release loan. 

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