Is It Possible to Repay Equity Release in 2024?
Key Takeaways…
- Yes, you can repay equity release early, but if you are considering it, remember to watch out for potentially significant charges, depending on your lender’s terms and conditions.
- Whilst repaying an equity release loan in it’s entirety is possible, some plans allow partial repayments without penalties, helping to manage the loan size and reduce interest accrual.
- What you owe calculated from the cash you receive, your interest rate, and your plan’s length, so consult with an adviser or the lender directly to understand the implications for your financial situation and estate planning.
When the time comes to repay 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 get out of your loan?
The simple answer is yes, but you will need to know exactly how you will be affected by early repayment charges, as they can make repaying your lifetime mortgage early a very expensive exercise.
In This Article, You Will Discover:
In this informative article, the EveryInvestor team will explore the various options available to UK homeowners seeking to repay their equity release loans.
Seeking equity release truths can help you make informed decisions about your finances.
Learn about the factors to consider when deciding whether to pay back equity release loans and regain full ownership of your property…
Your key to making an informed decision about accessing the value tied up in your property.
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- 10 Free Downloads & Checklists - from what questions to ask, to avoiding scams!
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What Defines the Concept of Equity Release in the UK?
For those over 55, equity release is a means to unlock the financial value of their property.
It is 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 passing.
Home reversion involves selling a part of your home for a cash sum or an income stream, whilst 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 repay your loan before it reaches it’s 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 is crucial to consult with a professional equity release advisor or broker who can help you assess your unique situation and the potential risks involved.
How Can You Repay an Equity Release Loan?
Repaying an equity release loan can be accomplished in several ways, depending on the terms of the agreement.
The loan can be repaid in full at any time, but this usually incurs an early repayment charge.
Some plans also allow partial repayments, reducing the loan amount and mitigating the accrual of interest.
It is essential to understand your specific plan terms to ensure you choose the most cost-effective repayment strategy.
Usually, equity release loans are repaid when the homeowner either passes away or enters long-term care.
The property is then sold, and the proceeds are used to repay the debt.
Alternatively, the beneficiaries can opt to repay the loan themselves to retain the property.
It is important to remember that the impact on inheritance can be significant, so discussing your plans with family members and seeking independent financial advice is highly recommended.
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 Repay Equity Release Early and Can You Repay a Lifetime Mortgage Early?
Yes, you can repay equity release early and you can repay 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 is 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 wish to repay a portion of your debt or repay the loan in full.
A quick look at your options…
Repaying the Interest
Repaying the interest on your lifetime mortgage is a good way to ensure your total debt does not grow.
It is 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 it’s fifth 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 repay may vary between lenders, and some may impose limits or additional fees.
The industry standard is 10% of the value of the loan per year, but some lenders may go as high as 40%.
Repaying Your Loan in Full
Repaying your loan in full could be an option if you have the financial means to do so.
It is possible to repay your equity release in full during your lifetime (as opposed to having your estate repay the debt once you have 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.
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 do not 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 passes away 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 have 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 need to sell your home, usually within six to twelve months of your passing or your going into care, to repay your lifetime mortgage.
Repaying a Home Reversion Plan
Repaying a home reversion plan works slightly differently because you will 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 it’s 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 need 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 are 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 repay 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, 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 will know exactly how much your penalties will be if you repay your equity release early.
You will 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 obvious.
If the early repayment charges on your equity release loan are variable, they are 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 will not need to pay ERCs.6
If gilt yields have fallen during that period, however, you will need 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 will 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.
Learn More: What Does the ERC Help With?
Downsizing Protection
If you are moving and your new property does not meet your lender’s criteria, your lender will only allow you to port your equity release if you repay a significant amount of your lifetime mortgage.
That would usually mean that you will need 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 is often the case that a partner or spouse cannot afford to or will not want to remain in the family home when the first co-borrower passes away 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 will not be liable for any ERCs.
Common Questions
Do I Need to Make Payments Towards My Equity Release Plan?
Equity Release Repayment on Passing Away: 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 Repay on Equity Release?
What Is the No Negative Equity Guarantee?
Can You Be Refused Equity Release?
What Happens If You Repay Equity Release Early?
Can You Make Repayments on Equity Release?
Are There Penalties for Repaying Equity Release?
Can You Fully Repay an Equity Release Loan?
How Are Equity Release Repayments Calculated?
In Conclusion
The financial hit of early repayment charges is just one of the factors you will need to consider if you are wondering if you should repay your equity release early.
There are some worthwhile benefits to repaying your loan, such as managing the compound interest so there will be more funds available for your heirs when your equity release comes to it’s natural end.
If you are 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 repay your equity release loan.
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