Can You Pay Back Equity Release
Equity release can be a great way for people to easily free up tax free cash to spend in their retirement. Much of its appeal lies in the fact that there is no need for monthly repayments and the loan only needs to be paid back when the borrower passes away or moves into care.
However, many borrowers worry about the implications of being stuck with an equity release loan for the rest of their life. If you have taken out an equity release plan or are considering it, you may be wondering whether it is possible to repay equity release early, before the end of your plan. This article will provide a full breakdown of how equity release schemes work and what your options for paying them back will be.
Topics that you will find covered on this page
Who is eligible for equity release?
The first thing to know about an equity release plan is that there are a few requirements that you need to meet before you can get equity release. You must own your own home, so there must be no outstanding mortgage payments due. If there is a very small amount left to pay on your mortgage, then you may be able to settle this with the funds released, as long as your lender accepts your application.
Secondly you must be over the minimum age of 55 and under the maximum age of 95. Equity release plans are designed for retirees, hence the age restriction.
You will also need to be able to repay your existing debt before releasing equity, or you may be able to come to an agreement with your provider in which you pay off the money owed as part of the equity release scheme.
The most important thing regarding your eligibility is the value of your property. It must usually be worth at least £70,000 and be in generally good condition in order for your application to be approved.
What are the two types of equity release?
Equity release is a very efficient way of releasing capital from your property, while continuing to be able to live there rent-free.
There are two main types of equity release to consider. The first type of equity release is known as a Home Reversion Plan. This involves selling part or all of your home to a provider for a cash lump sum payment, usually a percentage of the property value.
This means that when you die or pass into long term care, ownership of the property reverts to the provider.
The second form of equity release involves taking out a loan secured against your property. This is also known as a lifetime mortgage and is the more common of the two options. It is a similar concept to a standard residential mortgage but you do not need to make regular payments on lifetime mortgages and the total loan does not need to be paid back until the last borrower has passed away or moved into long term care.
The loan will gain interest but paying back the interest accrued while you are alive is optional. You have a number of options with most lifetime mortgages, and you can choose to make optional repayments or pay back only the interest to keep the balance owed level.
An equity release calculator may be able to help you get an initial idea of how much money you could release.
When is a home reversion repaid?
As above, home reversion plans do not need to be repaid until you have died or moved into long term care. This is because ownership of the property is technically transferred to the provider when the plan is taken out. When you die, the property will be sold, and the portion agreed with the home reversion provider will be paid to them. Any money remaining after the sale can go to your beneficiaries.
You should be aware that equity release providers will ask for a price considerably below market value so you will be paying a lot for the luxury of not having to move house.
With these types of equity release schemes, you may be able to buy back your share of the property but it will then be at the full market value so you will have lost a lot of money in doing so.
Therefore, if you are thinking about the possibility of paying back equity release early, you will be better off considering a lifetime mortgage. A mortgage advisor will be able to offer you advice tailored to your personal circumstances.
When is a lifetime mortgage repaid?
A lifetime mortgage, as the name suggests, is designed to last an entire lifetime. It is therefore only due to be repaid when one of two things happen; either you die, or you move into long term care. In the case of joint plans, this refers to the death of the last borrower.
Once this has occurred, the house will be sold and the amount owed, including the accumulated interest, will be paid off from the sale proceeds. Whatever is remaining in your estate can be added to your will to be received by your beneficiaries.
"Equity release can be a great way for people to easily free up tax free cash to spend in their retirement. Much of its appeal lies in the fact that there is no need for monthly repayments and the loan only needs to be paid back when the borrower passes away or moves into care."
Can you repay equity release early?
Some people may find the thought of a lifetime mortgage intimidating, and wonder ‘can you repay equity release early?’. It is definitely possible to do so. In fact, the Equity Release Council insists that lenders allow you to make partial or full repayments whenever you like.
However, you should be aware that this could incur a significant early repayment charge. Lifetime mortgages, unlike standard mortgages, do not have a set time frame in which all the money must be repaid. Instead, it is meant to remain in place for as long as you can continue to live in your home. Therefore, it is likely that any repayments that are not previously agreed upon will result in penalty charges.
Why am I charged an early repayment charge?
The fees which equity release lenders charge are designed to cover a number of different losses which may arise from your early repayment. They include admin fees as well as loss of long term interest rates and costs of reinvesting the money.
How can you pay off equity release early?
If you do decide that you might want to repay your loan early, there are a number of different ways of doing so. These are detailed below:
Interest only
Many borrowers prefer to take out an interest only mortgage in which lenders allow you to make monthly repayments, but only on the interest accrued on the loan. The rest of the capital borrowed remains repayable only upon the death of the borrower.
This is a popular form of repayment for those who want to free up some cash for their retirement but are worried about the dent that this will make in their estate. By paying back the interest every month, they can keep the balance owed level and preserve the value of their estate.
Most lenders will allow you to default on these payments at any time and add the accumulated interest onto the total amount owed.
Partial Repayment
Some people prefer to make voluntary partial repayments every month to reduce the cost of the loan. Depending on the equity release scheme that you agreed with your provider, these payments might incur an early repayment charge.
Equity release with a repayment option is most popular for those who still have some disposable income and wish to minimise the dent made in the value of their property.
Full Repayment
Paying back your equity release loan in full is a less common option and probably only undertaken in several specific circumstances. For example, if you were downsizing and were unable to transfer your plan, you may want to pay it off in its entirety.
It is best to speak with qualified advisors before deciding to pay back your equity release loan in full as it will likely incur some serious early repayment charges.
How much are early repayment charges?
How much early repayments charges are will, unfortunately, depend on each lender. Each lender may take a different approach to how they calculate the fees. Some lenders set a fixed percentage of the original loan and reduce this initial amount over the number of years since taking out the loan.
For example, if you choose to repay in the first few years of the loan, the percentage fees may be higher than if you wait till ten years after taking out the loan. Other lenders have a fixed time period, after which no redemption payments are charged.
Can I get a plan with repayment options?
The good news is that, if you are aware of the possibility of early repayment fees from the start, you can choose carefully which provider to use. Some lifetime mortgage providers offer flexible partial repayment options which allow you to pay up to 10% off the total loan back every year.
Be aware that this might require you to undertake an affordability assessment to make sure that you will be able to make these payments without any severe financial strain. You should always be able to stop making these payments at any point as they are entirely voluntary.
Can I get a plan with no early repayment charges?
You may be able to get a plan which offers no early redemption payments after a number of years have passed since taking out the mortgage. However, most lenders will require fees at the start of the loan, so you will be unlikely to find a plan with no early repayment charges at all.
It is a good idea to make sure you have all of the details of any possible charges before you agree to take out your plan. This way you can plan for a situation in which you might want to pay back your equity release early.
How do you make early repayments?
There are a number of different ways that you can make partial repayments towards your lifetime mortgage. You can do it by bank transfer, direct debit and cheque, to name a few. Your lender should let you know what payment method they prefer.
What are Fixed Rate Early Repayment Charges?
Fixed Rate Early Repayment Charges are a good thing to look out for when signing up to a new equity release plan. What it means is that the fee charged for repaying the loan early is fixed at a certain amount. This means that you can plan your finances more easily.
What are Variable Rate Early Repayment Charges?
A Variable Rate Early Repayment Charge is the opposite to the above. This means that you do not know what you will be charged until you make the payment. This could go to your advantage or your disadvantage, but in general it is better to know what to expect.
Fortunately, the Equity Release Council insists that all variable rate charges must be less than a set maximum amount so you can at least expect the worst case scenario.
Do I need to make payments toward my Equity Release plan?
It is important to remember that lifetime mortgages are designed to not be paid back until you have passed away or moved into full-time care. The loan will be repaid in full from the proceeds of the sale of your property, and so there is no obligation to make any payments while you are still alive.
In fact, the Equity Release Council standards ensure that the lender cannot ask for the loan to be paid early under any circumstances. You have every right to continue to live in your home for free until the end of your life.
Lenders authorised and regulated by the Financial Conduct Authority will also have to offer you no negative equity guarantee so that you never owe more than the value of your property.
This means that you don’t have to worry about circumstances out of your control, for example, a potential fall in property prices. Making early repayments on a lifetime mortgage will always be optional, not required.
What if you move home?
You may be wondering what happens to your lifetime mortgage if you decide to move to a new property. Fortunately, lenders regulated by the Equity Release Council will have to let you move your plan to another property, as long as the new property meets the original criteria against which your existing home was measured.
Therefore, if you sell your home and buy another home of a similar value, you will not have to pay back your equity release, and your plan should continue as normal. Make sure to ask your lender about this if you think that this might be a possibility for you.
What if you want to downsize?
If, on the other hand, you decide to move somewhere which does not stand up to your lender’s criteria, for example, somewhere of lower value, you may have to repay a certain amount of the equity released before transferring your plan. In this case, you may find yourself liable for early repayment charges.
Some lenders may offer downsizing protection. This means that you can repay the outstanding balance on your loan if you are downsizing and not be liable for any repayment fees. Once again, you should check what your lender’s stance is downsizing before agreeing to a plan.
Is equity release safe?
If you are worried about the risks of equity release, the best thing to do is always make sure that you only get equity release plans from lenders regulated by the Financial Conduct Authority. Certain lenders can be found on the financial services register, and these will be held to certain regulatory standards. For example, they will offer a no negative equity guarantee and downsizing protection, amongst other things.
If you are ever in doubt, you should contact a mortgage advisor for equity release advice about the risks of different equity release products. They will be able to give you a more accurate estimate of what money you could release than you would be able to learn from an equity release calculator.
Finally, you should bear in mind that equity release schemes such as a lifetime mortgage will affect your entitlement to means-tested benefits from the government, so think carefully about your situation before signing up to one.
Article author
Katy Davies
I am a keen reader and writer and have been helping to write and produce the legal content for the site since the launch. I studied for a law degree at Manchester University and I use that theoretical experience, as well as my practical experience as a solicitor, to help produce legal content which I hope you find helpful.
Outside of work, I love the snow and am a keen snowboarder. Most winters you will see me trying to get away for long weekends to the slopes in Switzerland or France.
Email – [email protected]
Frequently Asked Questions
When is a home reversion repaid?
As above, home reversion plans do not need to be repaid until you have died or moved into long term care. This is because ownership of the property is technically transferred to the provider when the plan is taken out. When you die, the property will be sold, and the portion agreed with the home reversion provider will be paid to them. Any money remaining after the sale can go to your beneficiaries.
When is a lifetime mortgage repaid?
A lifetime mortgage, as the name suggests, is designed to last an entire lifetime. It is therefore only due to be repaid when one of two things happen; either you die, or you move into long term care. In the case of joint plans, this refers to the death of the last borrower.
Why am I charged an early repayment charge?
The fees which equity release lenders charge are designed to cover a number of different losses which may arise from your early repayment. They include admin fees as well as loss of long term interest rates and costs of reinvesting the money.
How do you make early repayments?
There are a number of different ways that you can make partial repayments towards your lifetime mortgage. You can do it by bank transfer, direct debit and cheque, to name a few. Your lender should let you know what payment method they prefer.
