Can You Reduce Your Equity Release Debt With Voluntary Repayment Lifetime Mortgages?
Voluntary repayments on your lifetime mortgage are a way to avoid having a potentially large debt for the rest of your life if you have an equity release plan.
Different lenders have different policies regarding paying back equity release early; some place restrictions on how much you may repay, while others charge extra costs.
As experts in our field, we discuss the following in this article:
We’ve researched all the information you need to know about early equity release repayments to bring you this guide.
Here’s what we found about voluntary repayment lifetime mortgage.
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What’s a Lifetime Mortgage With Voluntary Repayments?
Lifetime mortgages with voluntary repayments allow you to make sporadic capital and/or interest repayments to help control the loan’s size.
- The most common kind of equity release is a lifetime mortgage, which is a loan secured against your home that enables you to access some of the tax-free cash from it while keeping full ownership.
- To lessen the size of the loan, you can pay a portion of the capital or interest.
- The timing of your repayments is up to you, and they are all optional.
- By reducing the size of your loan, you could end up saving thousands of dollars over the duration of your plan.
- You can use the funds you release in a variety of ways.
How Does a Lifetime Mortgage With Voluntary Repayments Work?
You can lower the size of your loan by making periodic capital and/or interest payments, leaving more to be left as an inheritance1 when your plan expires.
You can choose to lower your lifetime mortgage’s capital2 or interest payments, or both. Since these repayments are optional, you get to choose how much and when to pay.
It’s vital to keep in mind that most programmes include an annual payback cap.
They will charge you early payback fees if you exceed your credit limit.
To learn more, talk to an equity release advisor.
Advantages of Voluntary Repayment Plans
There are several advantages to voluntary repayment plans worth considering.
Here’s more information.
A Real Alternative to Retirement or Retirement Interest-Only (RIO) Mortgages
Voluntary payment plans are exempt from the lender’s affordability tests and the costs of remortgaging every few years.
Therefore, voluntary programmes might be helpful if you’ve been behind on any mortgage payments and your credit has been affected.
There Are No Additional Costs or Penalties
Lenders don’t impose any additional costs on voluntary repayments up to an annual amount of between 10% and 15%.
All the Benefits of Lifetime Mortgages
You still keep all the benefits of a lifetime mortgage, including full property ownership.
You also receive a “no negative equity” guarantee, and you may still take advantage of “Guaranteed Inheritance” or “Downsizing Protection” features.
Reduce the Amount of Interest Accruing
Voluntary repayments allow you to reduce the amount of interest that accrues over the lifetime of your loan.
Maximise the Inheritance You Leave
By taking advantage of the sizable annual voluntary payment allowance, you can reduce the outstanding debt on your lifetime mortgage more quickly.
Ultimately, this will leave a larger estate and payout for your beneficiaries.
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Disadvantages of Voluntary Repayment Plans
There are also some disadvantages to voluntary repayment plans that you need to be aware of.
There May Be Restrictions on Making Payments
The lender may limit the number of annual installments and the beginning date of payments.
For example, some might only permit a maximum of four payments per year, and others might only let payments begin 12 months after the plan’s start date.
Some institutions will also prohibit making a voluntary payment within a year of taking a drawdown payment.
There May Be a Minimum Balance Limit
Your lifetime mortgage may have a cap of a minimum balance set by some lenders.
When your plan expires, this is the minimum amount that must be your outstanding balance.
You risk paying early payback fees if you violate this.
You May Need to Sacrifice Disposable Income
You can only use voluntary repayment lifetime mortgages if you have the “extra money” to make repayments, so you should consider whether they are a suitable alternative for you.
You May Leave Little or No Inheritance
If you pick a lump sum or drawdown lifetime mortgage and don’t make any voluntary repayments, your loan’s interest repayments will accrue.
This will reduce the inheritance in your estate.
How Much Could I Save With a Voluntary Repayment Lifetime Mortgage?
Although the method of making your voluntary payments is totally up to you, there are 3 options based on the lifetime mortgage you are paying for.
Interest-Only Lifetime Mortgage
With an interest-only lifetime mortgage, you pay back the interest monthly. You will only need to repay the initial amount borrowed when the plan expires.
You could pay off this sum completely over a period of years or lower it by making additional voluntary contributions.
Lump Sum or Drawdown Lifetime Mortgage
With a lump sum or drawdown lifetime mortgage, when interest rates are 4% or less, you can pay off your lifetime mortgage in under 18 years by making voluntary partial payments up to the 10% to 15% maximum allowed each year.
It’s important to note that certain lenders cap your loan balance at £10,000; if it drops below that amount, early repayment fees can be due.
Ad Hoc Repayments
With ad hoc repayments, you are free to make voluntary repayments whenever and however you wish.
Some lenders allow you to make limitless annual repayments incurring no fees, starting at just £50.
This strategy won’t pay off your lifetime mortgage, but it will help control the final settlement and cut down on interest payments.
Partial Voluntary Repayment Mortgage Strategies
Some lenders allow you to pay more than the annual cap after having your lifetime mortgage for a full year. They call this a partial repayment.
It’ll reduce your debt if you make a partial payment, but you may have to pay an early repayment fee.
Your equity release service provider can assist you with how this payment will affect your lifetime mortgage.
They will also advise you if your lender will charge early repayment fees.
What Are the Early Repayment Charges on Equity Release?
The fixed rate that certain lenders impose may change based on how long you’ve had the loan.
For instance, they might charge 7% for the first five years, 5% from years 6 through 8, and 0% from years nine on.
Other lenders may permit you to pay back a specific percentage each year, like 10%, without being charged any costs.
Some lenders have variable rates, so you won’t know how much you’ll pay until you ask to make an early repayment request.
It’s also important to know.
When you take out an equity release plan, lenders assign a gilt3 (government security) to your plan, and on the day you request an early repayment, they impose fees based on how much the gilt return has changed.
The lender will bill you if the gilt yield has decreased. There is no penalty if the amount has increased or remained the same.
It’s important to remember that while some lenders base their early repayment fees on the initial amount borrowed, others utilise the sum that is now owed.
How Do You Repay Early?
Making an early repayment should not be that difficult. To make sure the procedure goes smoothly, follow these 3 easy steps:
Step 1: Check the Terms of Your Plan
Varied lenders have different policies on how much you can repay early and how much it would cost you.
Examine the details of your plan to be sure an early payback makes financial sense and to prevent any unpleasant surprises.
Contact your lender directly if you’re uncertain where to find the information.
Step 2: Speak to a Broker
Complicated regulations govern early repayment fees, so it’s a good idea to seek help from an equity release specialist.
They can calculate how much you’ll have to pay and provide you with personalised advice about whether it’s worthwhile to make early repayments.
Step 3: Set Up Payment
After speaking with a broker and deciding to proceed, the last step is setting up the payment.
OneTime direct debits, recurring standing orders, checks, bank transfers, and phone orders are all acceptable methods of payment for this.
Verify the payment methods that your lender accepts.
Things to Consider
Here are some important things to consider before deciding on a voluntary payment lifetime mortgage:
- Do your research and make sure it’s the correct choice for you before releasing tax-free cash from your house.
- Lifetime mortgages, which are loans against your home, will decrease the value of your estate and could affect your eligibility for means-tested benefits.
- Choose a plan that adheres to the Equity Release Council4 criteria, which include several safeguards, such as the no negative equity guarantee. This will ensure that you’ll never owe more than the value of your house.
How Much Interest Do You Pay Back on Equity Release?
The average equity release interest rate is between 2.86 and 6.9%.
Therefore, a good interest rate would likely be between 2 – 4%, although the rate you will get will depend on individual circumstances and it’s best to seek financial advice.
Can You Pay off Equity Release Early?
In some circumstances, you may repay your equity release early, although doing so would normally incur a very hefty early repayment fee.
You can make early repayments if you have a lifetime mortgage, the most popular equity release option.
There is, however, no commitment. Remember that until you die or enter long-term care, no payments are required on these loans.
There are a few alternatives available to you if you choose to make early repayments. The loan’s interest may be all that needs to be repaid.
Alternatively, you could make partial payments to lower the total loan balance; however, this usually has a cap of up to a particular percentage of the borrowed amount, such as 10% annually.
Before deciding, get guidance from a specialised equity release broker.
Should You Make Voluntary Interest Repayments?
Voluntary interest repayments are completely voluntary. Although if you’re able to make repayments, you can reduce the total amount you owe.
There is no penalty for not making payments if you have a plan that permits voluntary repayments but never makes payments.
If you have a lifetime mortgage with voluntary repayments, your lender will allow you to make sporadic capital and/or interest repayments to help control the loan’s size.
This can mean you’ll be leaving more of an inheritance for your beneficiaries when your plan expires.
You can also choose to make these voluntary repayments on your lifetime mortgage’s capital or interest, or both. Since these repayments are optional, you get to choose how much and when to pay.
However, it’s important to note that most programmes include an annual cap and they’ll charge you early payback fees if you exceed your credit limit.
There are advantages and disadvantages to voluntary payments which we recommend you consider and discuss with your financial advisor.
Before deciding on a voluntary payment lifetime mortgage, do your research.
A lifetime mortgage will decrease the value of your estate and could affect your eligibility for means-tested benefits.
Choose a plan that adheres to the Equity Release Council5 criteria, which include several safeguards for consumers.
Voluntary repayments on your lifetime mortgage are a way to avoid having a potentially large debt and are worth exploring with your equity release provider.
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