Can You Repay Equity Release Early?

One of the most popular reasons for getting an equity release product is people having reduced income in later life.

By using equity release you’re able to free up money that is otherwise tied up in your property (equity).

But our financial situations are fluid rather than static and sometimes you might find that you no longer need to rely on the equity release product and wish to repay it.

The big question here is can you repay the equity release and how much does it cost to do?

This guide explains everything you need to know about repaying your equity release and what to watch out for.

Is It Possible to Pay Off My Equity Release?

Yes, it is possible to pay off an equity release product but, in some cases, it can be very expensive to do so.

With most lenders you will need to pay a penalty for the early repayment known as an early repayment charge.

This charge can be a fixed amount or a percentage of the amount that is outstanding and you will need to check your documentation to calculate the exact charge.

It means that alongside the actual payment of the equity release you may also need to pay an additional fee. 

Early repayment charges typically apply if you pay off the loan, but even making payments towards the loan before you die or go into long term care can incur penalties.

Again, this is lender specific, and you might find that your equity release product has no penalties whatsoever.

There are even circumstances where early repayment charges may be waived by equity release companies. Such circumstances often include:

• Passing away or moving into long-term care
• Porting the equity release to a new property
• Owning the equity release product for over 10 years

You should check your equity release documentation or contact your equity release adviser if you’re unsure about what charges apply when repaying your equity release.

How Do Early Repayment Charges Work?

This depends on which lender you use, and you will find the early repayment charge varies between lenders.

Because most lenders approach early repayment charges differently, it is hard to give a definitive answer to this question.

In order to give you an idea we have outlined some of the more typical ways early repayment charges are applied.

Penalty Free Repayments

These fall into two categories, lenders that don’t charge an early repayment charge (ERC) at all and those that allow you to make payments up to a certain value without penalty.

Most lenders that allow payments up to a certain value will allow you to repay a fixed percentage of the loan each year.

For example, if you have £100,000 outstanding, they may allow you to make a 10% payment of £10,000 each year without penalty.

Paying above the 10% in our example would then incur a charge.

Early Repayment Charges and Timeframes

The lenders that charge fixed percentage ERCs will normally operate timescale brackets meaning the sooner you repay the loan the higher the repayment charge in most cases.

Here is an example:

Once again it is important to realise this is just an example and the timeframes and percentages will vary between lenders.

Some lenders also put an age cap on their ERCs, meaning once you reach a certain age you will no longer incur an ERC if the equity release is paid off.

Why Do Equity Release Lenders Apply Charges?

It is easy to look at early repayment charges and assume all the lender cares about is profit, and to some extent this is very true.

But the reason early repayment charges are levied is a bit more nuanced and mostly lenders are looking to mitigate risk.

When a lender of any mortgage lends money to a borrower, they have constructed the product in a way that gives them a minimum return on that loan. 

An equity release lender will be looking at the amount they have lent and normally offset this against the total property value.

The equity could potentially be their profit if you allow the interest to roll-up. 

For example, if you have a property valued at £200,000 and you release equity of £100,000, the lender will see the remaining £100,000 as their potential profit.

Of course, the longer you live and the longer the interest rolls up the lenders’ profit margin will increase.

If your property inflates at a faster rate than the compounded interest, your equity would increase and the lender would also earn their anticipated profit. 

To a lender, that scenario is ideal, someone takes an equity release product, they live for a long-time accruing interest and the property value may well increase over time.

But as you have probably guessed, the lenders’ ideal scenario doesn’t always play out. Sometimes people die or go into long term care soon after taking equity release and there hasn’t been much time for interest to accrue.

This is essentially the risk to the lender and they will look to mitigate that risk as much as possible across their overall lending.

When they lend money, they know full well that a certain percentage of their loans won’t be as profitable (if at all) compared to other loans.

As you can probably tell, lenders want to dissuade people from repaying the product before it becomes profitable for them and as a result some lenders apply ERCs.

These ERCs are typically designed to charge the amount of lost profit as a penalty to anyone repaying the money early.

It’s for this reason that most lenders have a sliding scale of charges which penalise those repaying soon after taking the product and being penalty free to those who have had the loan for a long time.

Can You Get Equity Release Without Early Repayment Charges?

Yes, you can! Unfortunately, they are not common, and most lenders have some form of early repayment charge.

As outlined above, the longer you hold the product the more likely the ERC is reduced or not charged altogether.

This means you will need to do a calculation when considering paying off your equity release within a certain time frame.

For example, if you want to pay off your equity release within 2 years and there is a 5% charge, it may still be beneficial to do so rather than wait until you can pay it off penalty free.

This is because the longer you wait the more interest accrues and you could find this interest amount is far more than the initial ERC.

Discussing your situation and equity release product with your broker will give you an idea of whether it is best to pay back the loan and pay an ERC or wait.

How Does Downsizing Work with Equity Release?

Depending on the product you have, downsizing can be either a straightforward or complex process.

The Equity Release Council was set up to implement standards across its members and currently represents 90% of the market.

If your provider is a member of the Equity Release Council, they have committed to meeting the following standards.

• For lifetime mortgages, interest rates are fixed or have a maximum cap in place.
• You have the right to stay in your home until you pass away or go into long term care.
• You have the right to transfer the lifetime mortgage to another property (as long as the new property meets the lender’s criteria – more information on this below).
• No Negative Equity guarantees.
• The right to make penalty free payments (although this is subject to lending criteria).

The Right to Move to Another Property Explained

This can either be downsizing or moving home in general.

The ERC standards allow for all borrowers who have an Equity Release Council product to port their equity release product to a new property.

This right does have caveats though:

1. The new property must meet the providers property criteria
2. The value of the property must meet the requirement to be a continued security against the loan.

This last point can be tricky with downsizing.

Repaying Equity Release and Downsizing

Older people downsize for a number of reasons, the two most common are:

• Mobility issues mean that maintaining a larger property is difficult and many people opt for a bungalow in later life.
• Selling a house and moving to a cheaper property can free up funds which helps with income after retirement.

Downsizing can sometimes be problematic as the property you look to purchase may not have the value required to maintain the loan.

In these cases, it could be a better option to settle the existing loan and use the remaining value in your property to purchase a new one.

You should discuss your intentions and current financial situation with an equity release broker so that they can look at your product and circumstances and provide advice specific to you.

In many cases, the best option is to port the equity release product providing your lender allows it.

Porting Your Equity Release

Porting an equity release product is often the most pragmatic way to move home in later years.

Again, you will need to discuss your situation with a broker and find out which option is best for you. 

You will need to ensure that the property you’re looking to purchase meets the security requirements for the loan and it is normally advisable to move to a property that has an equal (or as near as possible) value.

Your broker will be able to outline the minimum value that your property needs to be in order for it to be considered an adequate security against the existing loan.

There are fees that you will encounter when porting an equity release product, so make sure you ask your adviser what charges are applicable and how much they are.

This will help you budget for the move more effectively.

Conclusion

Early repayment charges are often applied to mortgage products, and this is also the case with equity release products. 

If you have an existing product, you will have been given documentation at the time of taking the equity release which outlines any fees or charges that are applicable to your loan.

This might be difficult to understand, especially trying to calculate the charge as a percentage of the loan.

To get an exact amount you should contact an equity release broker that is a member of the Equity Release Council. 

They will explain the product to you and help with any charges you may need to pay for repayments as well as maintain the same high standards as set out by the Equity Release Council.

They can also provide tailored advice to you about whether a repayment is in your best interests as it may be better sometimes to wait until the ERC percentage drops.

Downsizing and porting an equity release product is also an option with most lenders, but once more, it is highly advisable that you consult with an equity release broker to understand the consequences of doing so in your situation.

Boon Brokers is a whole of market mortgage, insurance and equity release broker.

We are also a proud member of the Equity Release Council.

Contact us today with any queries you have about equity release Boon Brokers provide FREE no obligation advice.