Is It Worth Paying Off Equity Release Early?

Can You Pay Off Equity Release Early?

If you’ve taken out a lifetime mortgage, the most common equity release product, you might be wondering if you can make early repayments. The good news is, yes, you can!

Lifetime mortgages often allow for early repayments, but these loans are generally structured with no payments due until particular events occur, such as the borrower’s death or a move into long-term care.

There are various options for repayment. You may choose to repay only the interest on the loan, make occasional payments to reduce the total loan amount, or in some cases, repay the entire loan.

It’s essential to note that lenders might impose limits on the amount you can repay annually, such as capping repayments at 10% of the borrowed sum. To fully understand the terms and conditions of your plan, consult your equity release adviser or provider.

What happens if I repay my Equity Release Plan Early?

The consequences vary depending on the type of plan you have and the specific details within it.

If You Have a Lifetime Mortgage

Repaying a Lifetime Mortgage early could mean facing an Early Repayment Charge, a detail you would have been briefed on at the outset of your plan. 

It’s crucial to discuss any possibilities of early repayment with your adviser when taking out the plan, as these charges and rules vary. 

Some plans might not have early repayment charges, some may apply them for certain years, while others may apply them throughout the life of the plan. Your adviser will help you pick the right option for your situation.

If You Have a Home Reversion Plan

Early repayment with a Home Reversion Plan often means selling your property share, which could result in not having enough funds for a new property. 

But, the Equity Release Council’s regulations allow for moving to an appropriate alternative property if it’s affordable, giving you some flexibility in this situation.

Equity Release plans are usually set up to last until the last borrower dies or goes into long-term care. Once the plan ends, the lender gets paid back for the money lent and any interest that’s built up.

That said, you do have the flexibility to make partial payments or even repay the entire plan at any stage. 

But be aware, if you choose to do this, you might have to pay an extra charge called an Early Payment Charge. 

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Description:

An infographic detailing the consequences of early repayment for both Lifetime Mortgages and Home Reversion Plans, including specific elements like charges, flexibility, and key details about each plan type.

Early Repayment Charges Explained

When it comes to early repayment of equity release, understanding the charges involved is key. Let’s break down the two main types of early repayment charges you might encounter.

Fixed-Rate Charges

Fixed-rate ERCs provide the benefit of clarity right from the start. You’ll know exactly what rate will be charged if you decide to repay early, eliminating any unexpected costs later on.

For instance, Canada Life is a provider that offers fixed-rate ERCs. Here’s an example of their charges:

Years	Percentage ERC on the Amount Repaid
1-5	5%
6-8	3%
9+	0%

Canada Life allows payments at any time, but after any ERC-free exemptions, a charge will be levied on the amount that’s repaid.

Variable Rate Charges Based on Gilts

Variable-rate ERCs offer a different approach where the charges are not fixed and can fluctuate. These rates must have an upper limit, as per Equity Release Council standards.

Before we delve into an example, it’s important to understand what gilts are. 

Gilts, which stands for gilt-edged securities, are bonds issued by the British government. They are considered a secure investment, and their yields (or interest rates) can go up and down depending on various economic factors.

One such provider offering variable-rate ERCs based on gilts is Aviva. Their charges are structured as follows:

• Maximum ERC: 25% of the initial amount borrowed
• Minimum ERC: 0%

Aviva calculates this charge based on the movement in gilt redemption yields from the completion date of the lifetime mortgage to the date you’re quoted an early repayment charge. 

If the gilt yield is lower when you’re quoted an ERC, you will incur a fee. This charge is valid for 3 working days from the quote.

In Aviva’s case, you might pay no additional charges for early repayment. But if you pay back in the first few years, the charges could be high. This link shows why knowing about the economy can help you with your equity release plan. 

If you think about paying early, it is wise to consult with an experienced mortgage adviser. Simply, fill out this form, and we will connect you to a good advisor to contact you directly, free and no obligation attached.

Key Takeaways

Fixed-Rate ERCs – Predictable and set in advance, but may have higher charges in the early years.

Variable-Rate ERCs – Flexible, potentially no charge, but can be unpredictable and substantial if yields fall.

How to Repay Early?

Here’s a step-by-step guide to help you repay your equity release early, simplifying the process:

Check the Terms of Your Plan

Different lenders have unique rules, so it’s vital to understand your plan’s specifics to avoid unexpected costs and ensure it makes economic sense.

Seek Professional Guidance

Consulting with a specialist equity release broker is a wise move before making any decisions. They can provide advice tailored to your situation.

Set Up Payment

Once you’re ready, setting up the payment is the final step. You can do this through a one-off direct debit, regular standing order, cheque, bank transfer, or over the phone. Your lender can provide information on accepted payment methods.

By following these steps, you make the process of early repayment a straightforward one. Being aware of the terms and costs and seeking professional advice ensures you’re well-prepared to take this significant financial step.

Suggested Image: An infographic illustrating the three steps to early repayment, offering a visual guide to the process. This can further simplify the procedure for the readers, allowing them to feel more comfortable with the idea of repaying early.

Downsizing Protection

Downsizing protection is an option that some equity release lenders provide. It lets homeowners pay off their loans in full without any early repayment charges, but certain conditions must be met. 

Even though it’s called downsizing protection, it doesn’t mean you have to move to a smaller home.

This protection comes into play if you choose to move to a new home that doesn’t meet the lender’s requirements for equity release. 

The rules for downsizing protection can differ from one lender to another, but a common condition is that the loan must have been active for a specific time, often five years.

The reason for offering downsizing protection is to give homeowners more flexibility. If you need to change where you live, you won’t face financial penalties from your equity release plan. 

Understanding this feature is vital if you’re thinking about moving, as it could influence your choices. To make sure you fully grasp the details, it’s wise to talk with an equity release adviser or your lender about the exact terms.

Are Early Repayments Permitted by All Lenders?

Yes, every lender will let you make early repayments on a lifetime mortgage 

Since 28 March 2022, a new rule makes it mandatory for lenders who are members of the Equity Release Council (ERC) to allow partial repayments without a penalty charge.

If your loan is ERC-approved, you can repay some of it early with no extra fee. But remember, this rule only counts for applications made after 28 March 2022. If your loan was taken out after then, you’re free to make early repayments without penalty.

What are the Pros and Cons of Early Repayment?

The following are some of the pros and cons of early repayment:

Pros:

> Reducing the overall debt.
> Increasing the potential inheritance for your loved ones.
> Greater financial freedom and flexibility.
> Possibility of securing lower interest rates in the future.

Cons:

> Potential high early repayment charges.
> Not all lenders may allow full repayment.
> Loss of certain benefits or features tied to the original agreement.

Before making any decisions, it will be wise to consult with a specialist equity release broker to understand your specific options and potential costs.

[Image Icons: Specific design/icons within the image: Icons representing pros (e.g., a checkmark) and cons (e.g., a cross).]

Should You Pay Off Equity Release Early?

Paying off equity release early isn’t for everyone, but there are certain situations where it might make perfect sense for you. Let’s explore some of those scenarios and the factors you should consider.

Scenarios Where Early Repayment Makes Sense:

> If you’re selling a property and want to be free from debt, early repayment could be the way forward.
> If you receive an inheritance, you may have the funds needed to reduce or clear your loan.
> If you have extra funds in your pension, paying off equity release could be a smart move.
> If you are moving to a new primary residence and want to buy it without debt on your current property.

Factors to Consider Before Repayment:

> Early Repayment Charges – Depending on your lender, you might face fees.
> Loan Amount – Consider how much you owe and how much you can afford to pay back.
> Financial Goals – Think about your long-term financial plans and how early repayment fits into them.

Situations Where Early Repayment Charges (ERCs) Don’t Apply

You might be concerned about early repayment charges (ERCs) on your equity release plan. But, there are times when you don’t need to worry about these charges:

• If the Last Person on the Mortgage Dies

• If the Last Borrower Moves into Long-Term Care

• If there are specific exemptions in your plan – Some equity release plans have special rules where ERCs don’t apply. These will be different for each plan.

Should you consider repaying some or all of your equity release plan early, it’s advisable to have a conversation with your equity release adviser. They will understand the intricacies of different plans and can guide you towards one that suits your needs. By planning, you can select a plan that won’t impose extra charges if your circumstances change.

The Bottom Line

Equity release is a significant financial decision, and you must have all the right information at your fingertips. While this guide has provided an overview, there’s no substitute for personalised advice.

If you’re considering an early repayment of equity release, talking to an expert could be invaluable. They can tailor advice to your specific circumstances, ensuring you understand all the options and potential costs involved.

Whatever your circumstances, expert advice is just a step away. Simply reach out today or fill out this quick form. And we will match you with a seasoned equity release advisor who can take control of your equity release plan. 

We carefully select every advisor we worked with and thoroughly evaluate them to ensure that you receive the highest quality guidance.