Suppose you have an equity release or are considering taking out a plan. What can you do if you want to pay the money back before you pass away? Is this even possible?
The natural end of an Equity Release plan is when you pass away or move into a care home, but you can repay earlier if you wish. Some lenders will levy Early Repayment Charges (ERC's) for you to repay sooner. However, there are several exemptions that you can use to avoid additional charges.
Let's explore how to repay an equity release plan early and help minimise any Early Repayment Charges.
The most popular type of equity release is a Lifetime Mortgage. As its name suggests, it is a special type of mortgage product that provides a lump sum of cash that does not need to be repaid until death. Lifetime mortgages are available to clients aged over 55. But what if you do want to repay the mortgage in full before death?
To repay a lifetime mortgage in full before death, you should contact your equity release lender and request a redemption statement. The redemption statement will detail how much is needed to repay the capital and interest accrued on the loan and any additional Early Repayment Charges levied.
The redemption statement will only be valid for a short period. It will show daily interest being accrued until your payment is received.
Different lenders levy Early Repayment Charges in different ways. It is worth noting that those linked to GILT yields will not be concrete until the payment is made. This can be particularly frustrating if not understood before the payment is made.
If you are repaying due to selling your property, the good news is that your solicitors will be able to handle the transaction for you.
Suppose you repay an equity release plan early (before the death of the last homeowner or when the last homeowner moves into long term care). In that case, you may be charged an Early Repayment Charge (ERC). The ERC structure is detailed in your mortgage offer under section 13; what happens if you do not want this mortgage anymore?
Let's look at an example of an Early Repayment Charge structure for a lifetime mortgage offered by More2Life:
Early Repayment Charges
Your lifetime mortgage is designed to be repaid when you (or both of you if there are 2 applicants) have died or leave your home because you need long-term residential care. If you repay your lifetime mortgage at any time for any other reason you may have to pay an early repayment charge.
You have to pay early repayment charges if you want to repay all or part of your lifetime mortgage during the first 15 years after the start of the mortgage for reasons other than those shown below. In the first year after the start of the mortgage, the early repayment charge will be 10% of the amount repaid. In year 2 after the start of the mortgage, the charge is 9%. In year 3 after the start of the mortgage, the charge is 8%. In year 4 after the start of the mortgage, the charge is 7%. In year 5 after the start of the mortgage, the charge is 6%. In year 6 after the start of the mortgage, the charge is 5%. In year 7 after the start of the mortgage, the charge is 4%. In year 8 after the start of the mortgage, the charge is 3%. In year 9 after the start of the mortgage, the charge is 2%. Between 10 to 15 years after the start of the mortgage, the charge is 1%.
This sound's very wordy, so the good news is that they then provide a grid detailing the specific amounts that would be charged, along with the very most that the ERC could be.
Let's look at an example for a £100,000 lifetime mortgage at an interest rate of 2.78%:
||Early repayment charge as % of the sum repaid
||What you will owe at the end of the year (£)
||Maximum Early Repayment Charge (£)
It is important to note that some lenders charge an ERC based on the amount repaid, others on the amount borrowed. For the example above, the Early Repayment Charge is based on the amount that is repaid, which is why the maximum ERC increases throughout years 10-15.
After the early repayment charge period has expired, you will be able to repay without incurring any ERC. However, what if you want to repay within this period? Are there ways that you can avoid an ERC being charged?
One of the most popular features of modern lifetime mortgages is making partial repayments without incurring an early repayment charge. Most commonly, you can repay up to 10% of the initial amount borrowed each year without incurring an ERC. However, some plans allow up to 40%.
This feature affords you the option to repay some or all of the interest that is being charged on the lifetime mortgage. This potentially gives you the option to treat your lifetime mortgage like an interest-only mortgage so that the balance owed at any one time is equal to the initial amount borrowed.
Some lifetime mortgages let you repay up to 40% of the amount borrowed each year without incurring an early repayment charge. This potentially gives you the option to repay the balance owed in full within three years of taking out the equity release plan. With this added flexibility, you no longer have to think about equity release being for life, and it can be a very cost-effective way to borrow money over the short term.
If you wish to make a partial repayment on your equity release plan, you should contact your lender to make the payment. Payment options vary by plan, and you will likely find that it is now easier to make the payment than when the plan was first taken out. Payment options now include cheque, telephone card payment, bank transfer, and Direct Debit.
Important: Make sure that you find out if an Early Repayment Charge is to be levied before you make the repayment.
If you are considering moving home, you may be able to make use of a lifetime mortgage early repayment charge exemption, downsizing protection.
Downsizing protection is designed to protect you if you move home and face an Early Repayment Charge. Most lenders offering this exemption allow it to be used after the first five years of having the equity release plan. Aviva is the market leaders, offering downsizing protection after just 3 years.
Not all lenders offer the same exemption, despite potentially using the same name. Some lenders offer to waive the ERC if you simply sell your home. Others will only waive the ERC if the new property is not one that they will lend on.
If you are considering moving, you will also have the option to take the equity release plan to your new home. This is commonly referred to as 'porting'.
When porting your equity release, you may be asked to repay a percentage of the lifetime mortgage.
Suppose you moved to a property that was worth half the value of your existing home. Then it is likely that you will be asked to repay half of the equity release balance. This shouldn't be a problem, though, as you should have enough funds from the sale proceeds of your existing home.
Your solicitors will be responsible for repaying the equity release lender on your behalf should you downsize.
For joint borrowers (most commonly husband and wife), an equity release plan offering a significant life event exemption could be essential.
If you take a joint equity release plan out, you may wish to repay following the death of the first homeowner or when the first homeowner enters permanent long term care. The significant life event exemption allows you to repay without incurring an early repayment charge.
Most plans which have this feature allow three years for the repayment to take place. When explaining this feature, I say this exemption gives you:
- A year to grieve;
- A year to plan;
- A year to sell.
You need to notify your equity release lender when a borrower passes away or moves into permanent long-term care. So, they should automatically invoke any significant life event exemption on your plan should you repay within three years of the event.
If you have a drawdown equity release plan, you should know that most reserve facilities are not guaranteed. In the event that property prices crash or the provider ceases to lend, any unused reserve facility can be withdrawn.
In the event that a drawdown equity release plan has its reserve facility removed, the lender may allow you to repay the equity release without incurring an early repayment charge. You could even replace the plan with a new one from a different lender, allowing you to access the latest interest rates and plan features.
Should you have an existing equity release plan that has had its reserve facility withdrawn, you can put us to work to see if the lender will accept repayment without charging you an ERC.
Throughout this guide, we have focussed on the most popular type of Equity Release plan, the lifetime mortgage. Currently, lifetime mortgages make up over 99.5% of the new plans we recommend. But what if you have an older type of plan which was previously more popular?
Can you repay a home reversion plan before death?
Home Reversion Plans were a very popular type of equity release plan sold throughout the 1990s. They are still available today; however, due to low-interest rates and the wide variety of features now available with lifetime mortgages, they are now much less commonplace. But there are still hundreds of clients with Home Reversion Plans still in place.
The biggest difference with a Home Reversion Plan is that you are no longer the full owner of your home. Instead, the reversion provider owns a percentage of your property in exchange for the cash that they have given you. The amount of money that you receive with a Home Reversion will be far below the market value of the property. This is because the reversion provider lets you stay in the property until you pass away or move into a care home.
There is no interest to pay on a Home Reversion, and instead, the reversion provider will own a set percentage of your properties worth.
In order to repay a Home Reversion early, you will need to be able to raise enough capital to re-purchase the percentage of your property that you previously sold.
If you sold a modest percentage, It might now be possible for you to raise enough money on a Lifetime Mortgage to repay the Home Reversion provider.
Depending on the terms of the Reversion Plan, there may also be an Early Repayment Charge to pay. You should contact your Home Reversion provider to find out how much you would need to pay to re-purchase your home.
Can you repay a Shared Appreciation Mortgage (SAM) before death?
Between 1996 and 1998, Shared Appreciation Mortgages were offered by a few banks as a way to release equity in your home without the need for monthly payments.
With a SAM, the bank would lend you a sum of money, usually around 25% of your property value, on an interest-free basis. In return, the SAM lender would be owed the initial money borrowed plus a share of the appreciation of the property value.
You would pay no monthly repayments of interest until the property was sold or the borrower passed away. When the property was then sold, the bank would then be entitled to the total of the initial advance lent, plus an additional sum of up to 3 times the increase in the value of the property.
Due to the property market skyrocketing, many SAM holders now face the prospect of a very large sum that would need to be repaid in order to clear the balance owed.
If you have a SAM, you should speak with your lender to find out if there are any options for you to make partial payments or how much would be needed to repay the balance owed in full.
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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