How does equity release get paid back?

Equity Release is a term used to describe various financial products designed to provide cash to the applicants. But the money that is released is not free, and it needs repaying at the end of the term.

For all plans which meet the Equity Release Council standards, repayment is due upon the death of the last borrower, or when the last borrower enters long term care. But, how does the money get repaid?

At the end of an equity release, the lender will need repaying. Most plans are repaid from the sale proceeds of your property. Your next of kin or the executors of your estate is responsible for the sale. The money owed can be repaid from other means, or the property refinanced, should your beneficiaries wish to keep the property.

We now have an overview of how each type of equity release plan needs repaying. But is there more to it? Let's explore the detail surrounding each type of plan.

In this guide, you will learn:

1. How does a lifetime mortgage get repaid?
2. How does a home reversion plan get repaid?
3. How does a shared appreciation mortgage get repaid?

We will also discuss:

• What if my beneficiaries want to keep my property?
• What if I want to repay early?

1. How does a lifetime mortgage get repaid?

At the end of the equity release plan, the amount owed to the equity release lender is the total of the capital borrowed, and the interest accrued on the plan.

Your estate is responsible for repaying the total balance owed, and most lifetime mortgages are repaid from the sale proceeds of your property.

Suppose the sale of the property is the repayment vehicle. In that case, it will be the responsibility of your next of kin or the executors of your estate to sell your property, not the equity release lender.

Firstly, the equity release lender will need to be notified that you are no longer living in the property. Your next of kin or the executors of your estate are most likely to inform the lender, so it is sensible to make them aware of your lifetime mortgage.

To find out exactly how much is owed, they should request a redemption statement from the equity release lender. The redemption statement will show the total amount owed and how much interest is being accrued daily.

The lender typically gives 12 months from the end of the plan for the monies to be repaid. After which, they reserve the right to "step in" to help with the sale of the property.

Any other occupants will also need to vacate the property at the end of the lifetime mortgage.

For equity release plans which meet the Equity Release Council standards, you're protected should any negative equity arise. The "no negative equity guarantee" means that the maximum repayable to the lender is the property sale price less any sale costs (both solicitors and estate agents). Suppose this is less than the total amount owed on the lifetime mortgage. In that case, the equity release lender will not charge your estate, or your beneficiaries a penny more (providing the property is sold at market value).

2. How does a home reversion plan get repaid?

The most significant difference between home reversion plans and lifetime mortgages is that no interest charged. Instead, you are selling part, or all of your home, to the home reversion provider.

The amount owed to the lender will therefore be a percentage of your properties value at the point of sale.

It could therefore be that when you vacate the property, the reversion provider owns all of the property.

Depending on the specific home reversion plan, there may also be rental charges which will need paying.

3. How does a shared appreciation mortgage get repaid?

A shared appreciation mortgage (SAM) is a special type of mortgage which does not need repaying until death. You will remain the proprietor and will have a charge on the property, just like a residential mortgage.

SAM's were only sold during a narrow window (1996-1998); however, thousands of plans were sold. Therefore, it is still relevant to discuss, although you are no longer able to take out a new SAM.

The maximum amount you could borrow was 25% of the property value. The amount owed at the end of the plan would be the original capital borrowed, plus three times the percentage borrowed of the property growth.

SAM's have worked out to be much more expensive than a comparable lifetime mortgage as property prices have grown far more significantly than initially anticipated.

Again, your executors or next of kin will need to notify the SAM provider of your passing, and arrange for the property to be sold.

What if my beneficiaries want to keep my property?

You may be concerned that your beneficiaries will be unable to keep your property if you have an equity release. Don't worry, regardless of which type of plan that you have, they will be able to keep the property, providing they can repay the money owed to the equity release lender.

If your estate has other assets it can sell, then it could be that the money provided repays the equity release. Alternatively, your beneficiaries may refinance the property.

Providing that your estate clears the balance owed, it should be possible to retain the property. Your beneficiaries would then inherit the property, and in most cases, they would not even have to pay any stamp duty.

What if I want to repay early?

All equity release plans need to be repaid upon the death of the last borrower, or when the borrower enters long term care. But what if you wish to repay before this?

You can repay equity release early at any time, but you may be charged a penalty for doing so, in the form of an Early Repayment Charge (ERC).

Early Repayment Charges differ vastly from each type of equity release plan, so it is essential that you understand what penalty you will be charged prior to making any repayments.

Lifetime mortgages are the most flexible type of equity release plan, and also the most popular. They have many extra features, including various early repayment charge exemptions, such as:

Downsizing protection

Some plans allow you to repay the equity release without any early repayment charge if you are downsizing to a new home. It is essential that you check your plan as there are differing wordings to this feature, depending on the lender. Some allow you to trigger this event from merely selling your home; others require that the new property does not meet their lending criteria.

Significant life event

If you are borrowing with another applicant (a joint equity release), the significant life event exemption could be very valuable. It allows you to repay upon the death of the first borrower, or when the first borrower enters long term care, without any early repayment charge. The feature allows you to repay within three years of either event and is optional, not mandatory.

Partial repayments

Many plans allow you to make partial repayments without incurring any early repayment charges. Most plans allow you to make voluntary repayments of up to 10% borrowed each year. However, there is one plan which allows you to repay up to 40% each year. Different lenders allow for a differing number of payments per year, and some will only allow you to repay after your plan has been in place for more than 12 months.

Porting to a new home

You can port all lifetime mortgages which meet the Equity Release Council standards to a new home. This means that you can take your existing equity release plan with you to your new home. The new home will have to be approved by the current lender. If you move to a property worth significantly less, you will likely have to repay some of the money owed. Any money which you do need to repay will not be subject to an ERC.

We have a complete guide which you can read on repaying early: Can I repay my Equity Release?

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.