Can You Pay Back Equity Release?
If you have taken or are considering Equity Release, you may be concerned about whether or not you can make repayments on your loan.
Because Equity Release will reduce the equity in your estate and reduce the inheritance you can leave to your next of kin you may want to pay back some or all of the Equity Release to preserve your estate.
But can you repay Equity Release? What do you need to do to repay your Equity Release and what should you be aware of?
This guide explains how repayments (both partial and full) work with Equity Release and how to do it in the most efficient way possible. Let’s explore this further.
- What is Equity Release?
- Making a Payment in Full on My Equity Release
- What Are Early Repayment Charges (ERCs)?
- Types of Early Repayment Charges
- Are There Ways of Avoiding Early Repayment Charges on Equity Release?
- Exceptions to Early Repayment Charges
- Further Information About Equity Release and Repayments
What is Equity Release?
Equity Release is a way of freeing up funds that are tied to the equity you hold in your property.
It can work in one of two ways a secured loan known as a lifetime mortgage, or a specialised sale known as a home reversion plan.
Essentially in both cases, you sacrifice some of the equity you hold in your property in return for a payment from a company.
How that payment operates depends on the specific type of Equity Release product you use.
Lifetime mortgages are like traditional mortgages except instead of making monthly repayments, your interest rolls up and the property is sold or refinanced when you pass away or go into long-term care.
For example, you might agree to borrow money against 50% of the equity you hold in your property the lender releases the funds and then the interest begins to accumulate.
Your loan (capital and interest) is then repaid by the lender or your beneficiaries from selling/refinancing the property when you die or go into long-term care.
You can live in the property until those eventualities without paying rent, and you even have options to port the Equity Release with most products if you want to move home or downsize.
Currently, lifetime mortgages are the most popular way of releasing equity as the amount of money you receive is a fair market value for the equity you hold.
Home Reversion Plans
Home reversion plans work differently. Instead of borrowing the money, you sell the equity portion up front to a home reversion company.
The provider will sell the property in the event you pass away or go into long-term care to recoup their costs.
Providers make money in two ways typically, the first is they offer far below the market value for the equity you are intending to release so they automatically have their profit margin covered.
Secondly, they hope the equity they hold will increase in value as property prices rise, giving them additional profit if this occurs.
Home reversion plans aren’t used as often as lifetime mortgages because the amount of value you get for the equity you’re releasing is often unfavourable but they can be a good idea for people looking to preserve some equity to leave as an inheritance.
This is because with a home reversion plan there is no loan and no interest.
If you release 50% of the equity in the property on a home reversion plan, you still hold the remaining 50% of the equity, which can be left as an inheritance.
For this reason, in some cases, this type of Equity Release can be the better option.
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If I Want to Make Payments to My Equity Release Can I?
Yes, you can make payments to a lifetime mortgage with some requirements but you ordinarily can’t buy back the equity on a home reversion plan unless the home reversion company has this as an option in their agreement with you.
For the purposes of explaining repayments, we will focus on lifetime mortgages for the remainder of this article as they currently make up 99% of all Equity Release products sold on the market.
If you have a home reversion plan and wish to buy back your equity, you should check your documentation and contact your Equity Release broker/company to see if this is possible.
Making Partial Payments to Equity Release
Most Equity Release products allow you to make partial payments to your Equity Release product, subject to conditions.
These conditions normally mean you will pay financial penalties or pay early repayment charges if you want to make partial or full payments on your Equity Release.
With that said, many reputable Equity Release companies allow you to make penalty-free partial repayments up to a certain value.
These companies tend to be members of the Equity Release Council which oversees around 90% of the Equity Release market.
The Equity Release Council and Repayments
The Equity Release Council is a membership organisation that Equity Release providers and brokers can pay to be a member of.
In return the members can state that their products meet the high standards that are set out by the Equity Release Council unfortunately, 10% of the current market don’t subscribe to the Equity Release Council and sometimes offer sub-standard products as a result.
Among the many standards the Equity Release Council has for its members, the ability to make penalty-free payments (subject to lending criteria) is one of them.
This means if your product has been taken with a provider that is a member of the Equity Release Council you should be able to make penalty-free overpayments to the loan.
Normally this is up to a fixed percentage. For example, a company may allow you to make a payment of up to 10% of the amount outstanding each year on your Equity Release without financial penalty.
Anything above a threshold imposed by a lender will be subject to penalties or if you want to repay the Equity Release in full there will almost certainly be an early repayment charge.
Making a Payment in Full on My Equity Release
If you want to make a full repayment on your Equity Release, there are three things you should do:
- Check your documentation to see what it says about full repayments and what early repayment charges might be applicable.
- Sometimes, this information can be confusing as lenders tend to use staggered early repayment charges depending on how long you have held the Equity Release in which case call your provider to clarify the exact charge.
- Discuss your situation with your broker, sometimes it can be beneficial to wait before repayment because the interest you accrue by waiting is less than the value the early repayment charge drops.
Before we go into more detail about those points, let’s understand what early repayment charges (ERCs) are.
What Are Early Repayment Charges (ERCs)?
An early repayment charge is a charge applied by a lender if you want to make an early repayment.
The reason they charge a fee is that by repaying early, you’re depriving the lender of the interest they would have made, had you not repaid early.
The charge is sometimes used as a disincentive by lenders to make early repayment but most commonly it is used to cover some of the profit they lose when you repay early.
It is worth noting that lenders operate on a minimum profit threshold when offering loans, so an early repayment charge will be designed to keep a lender at the minimum profit.
If you repay Equity Release early on into the life of the product, there is no way that the ERC will ever cover the full potential profit of the Equity Release instead, it will take the lender to a minimum profit level they deem acceptable for their risk calculations.
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Types of Early Repayment Charges
There are two types of early repayment charges that a lender can charge.
Depending on which lender you use and how they operate their Equity Release products will determine which charge is applied.
Lenders will either charge fixed or variable ERCs again your documentation is your first port of call to find out which type of charge your lender uses.
Some lenders charge a fixed rate for the early repayment charge that is calculated on the length of time you have had the Equity Release loan.
For example, you may be charged 7% in the first five years and that percentage decreases every few years until it drops to 0% from year ten onwards.
These are typically the easiest ERCs to deal with as your documentation will outline the exact percentage you will need to pay when repaying early.
These ERCs are a little more complicated because you won’t know how much you will need to pay unless you contact the lender to get the figure.
For example, Legal and General will need to be contacted to get the amount you need to pay at any given time if you wish to repay early.
Because these are an unknown quantity, it can be very difficult to budget for an early repayment charge and you will need to contact your lender before deciding if early repayment is even feasible at the time you want to pay it.
Are There Ways of Avoiding Early Repayment Charges on Equity Release?
Unfortunately, if a lender applies an early repayment charge there aren’t any ways to avoid the charge with one exception with most fixed-rate charges you can delay repayment until a point where the charge is 0%.
The general rule is that if you’re repaying your Equity Release in full, there will normally be an early repayment charge unless you have held the product for a long time and the lender operates a fixed rate ERC.
Exceptions to Early Repayment Charges
There are also circumstances that don’t always trigger an early repayment charge. These are outlined below.
As mentioned, some lenders will allow you to repay either a fixed amount or a certain percentage of your loan without triggering the ERC.
For example, you may be able to pay 10% of the loan each year without financial penalty.
If you’re porting your Equity Release and the product is with an Equity Release Council provider, the likelihood is that there won’t be any financial penalty of ERC.
Lenders that don’t subscribe to the Equity Release Council may not allow you to port the product or may charge financial penalties if you do so.
If you downsize, providing the property you’re moving to is sufficient to service your Equity Release product, you shouldn’t incur any ERC from an Equity Release Council provider.
Once again, providers that don’t meet Equity Release Council standards operate their own terms and conditions with regard to downsizing, with some not allowing it and some charging financial penalties.
Significant Life Events
If you have taken your Equity Release with another applicant, the significant life event clause can be invaluable.
If one of the applicants dies or goes into long-term care, you are able in some cases to repay the Equity Release within three years of the event without an ERC.
This option doesn’t need to be exercised though, so if you don’t have the funds to clear the Equity Release you don’t need to.
It is entirely down to your circumstances whether or not this option is a good idea for you.
With most equity release products that fit the standards from the Equity Release Council, there will be no early repayment charges following the death of applicants or if they move to long-term care.
Therefore, in either of those scenarios where a beneficiary then inherits the property, no early repayment charge should be payable to the beneficiary.
Further Information About Equity Release and Repayments
Whenever you’re considering making an overpayment on your Equity Release you should take into account ERCs.
This is even the case if you have held the product for a long time because variable ERCs can be charged many years down the line.
The first step is to check your documentation and find out what type of charge applies.
Once you have this information you have two options:
- If you have a fixed charge, calculate whether it is best to pay the loan off now or wait for a decrease in the fixed percentage. For example, you may be a month away from a decrease in the ERC and it could be financially beneficial to wait the month.
- If you have a variable rate charge you will need to contact your lender to find out how much it is.
If you’re unsure of anything, contact a regulated broker who will be able to explain everything specific to your situation.
Boon Brokers is a whole of market mortgage, insurance and equity release broker, if you have questions about equity release or your product, get in contact with Boon Brokers today.
Boon Brokers is a member of the Equity Release Council and offers fee FREE no obligation advice.