When considering equity release, you may worry that you will be stuck with a rigid plan for the rest of your life. When advising clients, I am often asked if payments can be made back against an equity release?
With an equity release plan approved by the Equity Release Council, you can make partial, or full repayment whenever you like. Some plans allow you to make payments without charges; however, some plans will require you to pay additional fees.
This is one of the many reasons I only recommend equity release plans that meet the Equity Release Council standards.
Your equity release offer will show how you can repay your equity release, and if you have an existing plan, you can always check with your equity release provider.
Watch the video, or read the full guide below, to find out more about repaying your equity release, and what charges you may incur.
In this guide, you will learn:
Throughout this guide, we will be focussing on the most common type of Equity Release plan, the lifetime mortgage. Currently, lifetime mortgages make up over 99.5% of the new plans we recommend. If you would like further information regarding making payments on other types of equity release, including Home Reversion Plans, please contact us.
With lifetime mortgages, you can make partial repayments at any time you wish. Payment types include cheque, bank transfer, telephone card payment, standing order, and Direct Debit. You should check with your lender for the latest methods of payment that they currently accept.
Many plans allow you to make partial repayments free of charge up to a certain percentage of the amount you borrowed. Typically up to 10% each year, while some plans allow up to 12%, and others 40%. They are affording you the flexibility to pay none, some or all of the interest accrued on the plan. You could also make payments above interest charged, allowing you to reduce the capital owed and can save you money when the plan ends.
Remember: If you were to make a repayment above your plan's allowance, you might incur an early repayment charge (ERC). These include administration charges, and also for the potential loss in income the lender will make by you reducing the capital owed.
If you are thinking about making payment against your equity release, it may be beneficial to seek advice from your equity release advisor.
Equity Release plans are designed to run until the death of the last borrower, or when the last borrower moves into long-term residential care. At the end of the plan, the lender will be repaid for the capital and interest accrued.
Despite this, you can make payments against the Equity Release plan, or repay it in full at any point in time.
However, when making repayments, you may incur an Early Payment Charge.
Early Repayment Charges (ERC's) are additional fees charged by your lender for making repayments on the plan outside of any pre-agreed allowances. The charges levied are designed to cover the losses the lender has occurred by you repaying sooner than they expected.
Different lenders with different plans levy charges in different ways, so it is essential you understand any charges associated with your plan.
Equity release plans with Fixed-Rate ERC's
The most significant benefit of fixed-rate ERC's is that you know exactly what rate ERC is charged before you sign any legal paperwork for the plan. Meaning that there are no nasty surprises later if you wish to make payments back on the plan.
Canada Life offer fixed-rate ERC's on plans, an example of their charges on some of their plans can be seen below:
Canada Life state:
Payments can be made at any time. After any ERC free exemptions, you will be charged an ERC on the amount that is repaid.
| Years |
Percentage ERC on the amount repaid |
| 1 |
5% |
| 2 |
5% |
| 3 |
5% |
| 4 |
5% |
| 5 |
5% |
| 6 |
3% |
| 7 |
3% |
| 8 |
3% |
| 9 onwards |
0% |
Variable-Rate ERC's
With variable-rate ERC's, you do not know what charges will be levied until you make any payment. All variable rate ERC's must have an upper limit to meet the Equity Release Council product standards.
Aviva offer variable-rate ERC's on their plans, let's look at an example of their charges below:
Maximum ERC of 25% of the initial amount borrowed.
Minimum ERC of 0%.
Aviva state:
We calculate this charge based on the movement in gilt
redemption yields between the date the lifetime mortgage completed and the date you are quoted
an early repayment charge. A gilt is a Government security and a number of different gilts are
available. The specific gilt associated with your lifetime mortgage is chosen to reflect its
expected term. You will incur an early repayment charge if the gilt yield is lower on the date you
are quoted an early repayment charge than on the date the lifetime mortgage completed. Where
we quote you an early repayment charge it will be valid for 3 working days, including the day the
figure is quoted. This is explained more fully in your terms and conditions booklet.
As you can see, with Aviva plans, you could potentially pay no additional charges for repaying early. However, if you repay in the first few years, you could be charged far more in Early Repayment Charges, than for the interest that could have accrued!
It is essential that you discuss your plans to repay with your equity release with your advisor prior to taking out any equity release plan.
ERC's on Initial Borrowing vs Balance
When comparing plans, it is important to know that some lenders base ERC's on the initial borrowing, while others calculate it on the current balance outstanding. This could potentially have a significant impact on the ERC that is charged, depending on when you make the payment.
For example, if you borrowed £100,000 at 5% AER, the amount owed after four years has grown to £121,551.
With an ERC penalty of 5% of initial borrowing, the maximum ERC is £5,000.
With an ERC penalty of 5% of the balance owed, the maximum ERC is £6,078.
The easiest ways to find out how ERC's are charged on your plan are by checking your mortgage contract document, or by contacting the lender directly.
Once you understand how the charges are calculated, you should know if any charges are likely to be incurred for payments you are planning to make.
An equity release adviser can help you if you are unsure of charges the lender will make.
At the point of making payment to the lender, you should request details of any charges they are imposing, and how much you are reducing the balance owed.
You will never be asked to pay an early repayment charge if you repay following the death of the last borrower, or if the last borrower moves into long-term care. If you make payments back on your plan before this, you may be charged an ERC. Below we have listed common ERC exemptions which are included in some plans. If you believe you may make payments back on your plan before the natural term end, you should discuss this with your equity release advisor.
Overpayments
Many lenders offer plans which allow you to make partial repayments without incurring ERC's. They are often on an informal basis where they enable you to make payments but are not required.
We have already discussed how some lenders offer plans which allow up to 10% repayment each year, while some plans allow up to 12%, and others 40%.
But this isn't the only difference. Some lenders allow you to make unlimited payments from day one. However, other lenders will set the maximum frequency of payments and require the plan has run a minimum time.
Let's look at an example of overpayment exemption offered by Aviva on a new plan.
Aviva state:
Once you have had your lifetime mortgage for one year, you can choose to make partial
repayments.
Each year, the maximum amount you can repay is 10% of the initial amount you have borrowed. If
you borrow more or borrow from your cash reserve you can also repay up to 10% of those
amounts each year. You can repay in up to 4 instalments every year but each must be a minimum
of £50.
When you make a partial repayment we will apply this to your lifetime mortgage on the day the
money is received and the amount on which we charge interest will reduce. We will send you a
statement to show how your lifetime mortgage has reduced.
Porting your plan when moving property
All lifetime mortgages that meet equity release council standards are portable. This means that you may transfer your lifetime mortgage to a new property when moving, providing that the new property matches your lender's property criteria.
You can use the sale proceeds of your property to pay your equity release back in full when you move to a new home. However, you may incur an early repayment charge.
Moving house doesn't always mean you need to pay your plan back in full. Instead, you can port your existing plan to a new property. All lenders that are part of the Equity Release Council allow you to do this as long as the lender approves of the new property for their lending criteria.
Please note: If the new property is significantly lower in value, your lender may require you to repay part of your mortgage balance.
For example, if you were moving to a property which was 50% of the value of your existing property, you may be requested to pay 50% of the amount owed to the lender. This is because their security has dropped by 50%. This shouldn't be a problem as; hopefully, you will have enough to cover the required payment from the sale proceeds of your existing home.
Let's look at an example of an exemption offered by Aviva on a new plan.
Aviva state:
If you move home and want to transfer this lifetime mortgage to your new property,
you can do so if your new property meets our lending criteria at the time of your
application. You will have to pay an application fee but not an early repayment
charge. If your new property is of a lower value, we may ask you to repay part of
the amount you owe. If you move home and your new property does not meet our
lending criteria, you must repay this lifetime mortgage and you may have to pay an
early repayment charge.
It's also worth noting that different lenders have different underwriting criteria. So while your new property may not meet criteria for your existing lender, you still may be able to get equity release with another lender.
I have written a complete guide on moving home with equity release, which you can read to understand the process fully.
Downsizing Protection
Downsizing protection is another excellent exemption offered by some lenders. This exemption which allows you to pay your equity release back early when you move home, without incurring any early repayment charge.
As the name suggests, it's often used when you downsize and move to a new property that is lower in value. However, it could be that you move to a larger property or a property higher in value.
Different lenders have variations for this feature. A notable difference between lenders is that some will only let you use downsizing protection when they don't approve of the new property. Other lenders allow you to use it at any point, regardless if they are willing to port your existing plan.
Another difference amongst lenders is some of them offer you to be able to use the feature from day one. However, other lenders won't allow it to be used until a set amount of time has passed – typically after five years. It's essential you understand the feature fully for any plan that is recommended to you, and especially if you plan to use it.
One Family offer Downsizing Protection on plans; please see an example of this feature below.
One Family state:
If, after 5 years from the original lifetime mortgage completion, you repay your mortgage as a result of selling your property
and moving to a different property, OneFamily will waive any early repayment charge.
Significant Life Event exemption
Let's look at an example of an exemption offered by Aviva on a new plan.
Aviva state:
Early repayment charges do not apply if you have a joint lifetime mortgage and you repay within three years of the date that one of
you has died or the date that you notify us that one of you needs long-term care.
With all lifetime mortgages, you are not required to make mandatory payments while you are alive.
What's more, all lifetime mortgages approved by the equity release council require that the lender cannot ask for the money back early in any circumstance. Even if property prices crash, interest rates spike or the lender ceases to trade. You will always be able to live in your home for as long as you wish.
We work with equity release brands you can trust
Throughout this guide we have looked at examples from a few lenders, but they are not all that we work with. Find out more about lenders and plans specific to you by booking your FREE equity release consultation.
If you have further questions, why not speak with one of our qualified advisors?
Call us on 0207 158 0881 or use our online form to book your FREE consultation.
While a qualified equity release advisor has written this guide, it is not intended to be used as financial nor legal advice and should not be relied upon.
To understand the full features and risks of an Equity Release plan, ask for a personalised illustration.
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