No Early Repayment Charges on Equity Release: Could It Be Possible?
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- Equity release plans can have early repayment charges (ERCs) if the loan is paid off before the end of the term.
- The amount of ERCs varies, often depending on the loan's duration and the lender's terms.
- Fixed ERCs provide certainty, while variable ERCs fluctuate with market conditions.
- Some equity release plans offer low or no ERCs, but may have higher interest rates.
- Avoiding ERCs can involve strategies like choosing plans with low charges, making voluntary overpayments, or downsizing protection.
Have you ever wondered whether equity release with no early repayment charges could be more than a hopeful homeowner’s pipe dream?
When going through the different equity release stages, it's important to consider whether paying off your equity release early is something that's important to you.
The good news is that repaying your equity release loans with no early repayment charge could indeed be possible!
In This Article, You Will Discover:
The team at Every Investor has dedicated extensive hours to provide you with the answers.
Read on to find out if equity release with no early repayment charges could be possible for you.
What Is Home Equity Release In The UK?
Equity release, available to homeowners over 55 in the UK, turns property equity into accessible cash without the need to sell.
It's a financial strategy for supplementing income or funding life goals.
By choosing to release equity from their house in the UK, the homeowner receives funds against their property, with repayment deferred until the home is sold, either in their lifetime or from their estate.
What Are Early Repayment Charges?
Early Repayment Charges (ERCs) are fees that lenders may apply if you pay off your equity release plan earlier than agreed.
These charges compensate the lender for potential loss of interest income.
ERCs vary by lender and plan, typically decreasing over time.
Understanding these charges is crucial for those considering early repayment.
Can You Pay Off an Equity Release Loan Early?
Yes, you can pay off an equity release loan early, and there are various ways this can be done based on industry standards set by the Equity Release Council (ERC).1
Early repayment charges (ERCs) may apply depending on the stipulations of your equity release agreement.
What Are Equity Release Early Repayment Charges?
Equity release early repayment charges (ERCs) are fees levied by the lender if you pay off your equity release mortgage before it comes to an end.
Why would my lender do this?
Your lender calculated the interest rate on your equity release plan based on the assumption that the loan would only become repayable once you pass away or go into long-term care.
Early repayment charges (ERCs) are implemented to offset the potential interest loss that the lender would have incurred if the loan had reached its scheduled maturity. Lenders have established robust risk management systems and controls to ensure fair outcomes and protect customer interests.
These penalties can be quite steep.
What’s a Typical Equity Release Early Repayment Charge?
A typical equity release early repayment charge can range from 5% to 25% of the amount being repaid early.
The precise amount depends on factors such as the lender's terms, the type of equity release plan, and the duration of the loan.
It’s essential to carefully review the terms and conditions of your equity release agreement to understand the charges you may face if you decide to pay your loan back early.
Fixed vs Variable Early Repayment Charges
Whether you’ll pay fixed or variable early repayment charges will depend on what your original equity release agreement says.
Fixed early repayment charges remain constant throughout the loan term, providing certainty and predictability.
In contrast, variable early repayment charges fluctuate based on market conditions or a predetermined formula.
While variable charges may sometimes be lower than fixed ones, they can also increase significantly, leading to higher costs in the long run.
Equity Release With Fixed Early Repayment Charges
Equity release with fixed repayment charges refers to a plan where the ERCs are calculated as a predetermined percentage of the amount of capital being repaid.
Equity Release With Variable Early Repayment Charges
Variable ERCs are based on the long-term interest rates linked to the FTSE gilt yield index.4
Your Mortgage Offer includes a benchmark interest rate, which will be slightly higher than the index was when your mortgage was initiated.
How does all this work?
Basically, if the gilt yield’s the same or higher than the benchmark interest rate, you won’t pay any early repayment charges.
You will, however, be liable for ERCs if the index is lower than your benchmark interest rate.
Which Lenders Offer Fixed Early Repayment Charges?
Various lenders offer fixed early repayment charges, including Aviva, Legal & General, and more2life.
These lenders are committed to adhering to the Equity Release Council's standards, ensuring compliance with FCA requirements.
While they offer predictability and stability regarding repayment costs, it's crucial to thoroughly compare interest rates, features, and other fees to determine the best option for your unique financial situation.
Remember to review their terms and conditions, including regulatory statements and risk warnings, to understand how fixed ERCs are calculated and how much you could be charged if you decide to pay off the loan early.
Which Lenders Offer Variable Early Repayment Charges?
Lenders such as Hodge Lifetime, Pure Retirement, and Just offer variable early repayment charges on their equity release plans.
While these plans can provide lower initial charges, it's essential to understand the factors that could cause the charges to increase and assess the potential risks and benefits involved.
You should review the terms of the loan agreement carefully to understand how variable ERCs are calculated and how much you could be charged if you decide to pay off the loan early.
Can I Get Equity Release With Low Early Repayment Charges?
Yes, you can get equity release with low early repayment charges.
To do so, you must shop around and compare various lenders and products.
Some providers may offer reduced charges or more flexible repayment terms, but these options may come with higher interest rates or other trade-offs.
How Can You Avoid Early Repayment Charges on Equity Release?
To avoid early repayment charges on equity release, you could consider several different strategies.
These strategies include:
- selecting a plan with low or no charges
- opting for a drawdown lifetime mortgage with a reserve facility
- considering alternatives to equity release, such as downsizing or borrowing from family members
- making voluntary overpayments
- opting for downsizing protection
- benefitting from the significant life event exemption
Let’s take a closer look at some of these options.
Many equity release products will allow you to make voluntary overpayments to reduce the effects of compound interest or the overall debt owed.
The Equity Release Council’s 5th product standard5, introduced in 2022, also allows borrowers to make penalty-free partial repayments, meaning you can pay off the interest or a portion of the capital every month without incurring any costs.
Downsizing protection is another feature of many modern equity release plans that allows you to repay your loan without incurring early repayment fees if you sell your home and downsize to a smaller property.
Suppose you downsize to a property that doesn’t meet your lender’s criteria 5 or more years after taking out your equity release plan. In that case, your lender will allow you to repay your equity release loan from the proceeds of the sale without demanding ERCs.
Significant Life Event Exemption
A significant life event exemption allows you to repay your equity release mortgage without incurring early repayment fees in the wake of a major change, such as the death of a spouse or a move to a care home.
Mr. and Mrs. Brown have had a joint equity release plan on their family home for 12 years, when Mrs. Brown suffers a stroke and needs to move to a long-term care facility.
Mr Brown doesn’t want to stay in the home without his wife and opts to sell their property and move in with the couple’s daughter.
In this case, the Browns won’t be liable for early repayment charges, thanks to their equity release plan's significant life event exemption.
* This is for indicative purposes only.
Can I Pay Off My Parents’ Equity Release?
Why Would You Repay Equity Release Early?
How Do I Pay Off a Lifetime Mortgage Early?
With Which Lenders Can You Pay Back Equity Release Early?
Is It Worth Paying Early Repayment Charges?
Are Lifetime Mortgage Early Repayment Charges the Same as With Equity Release?
What’s the Aviva Equity Release Early Repayment Charge?
Early repayment charges on equity release loans can be a significant financial burden.
However, you can potentially minimise or avoid these charges by understanding the differences between fixed and variable charges, researching various lenders and their offerings, and considering alternative strategies.
Always consult a professional financial adviser to ensure you make the best decision for your circumstances.
By exploring available options for paying off your equity release loan early and following guidelines to avoid significant penalties, achieving equity release with no early repayment charges is feasible.
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