Equity release is often seen as a fantastic option for homeowners to give their pension pot a boost, upgrade their home or assist family members financially. The problem is, it still has to be paid back, and it’s those very family members you assisted who may be losing some inheritance by dealing with it when you pass away.
This leads many to look at ways to pay it back so that the impact of the equity release loan is not felt by others in the future. Luckily, some lenders are happy for equity release to be paid back early but they likely have strict rules around the payments. In this edition of our blog, we look at paying back equity release and how it can be made possible.
What is equity release?
Before we dive in, let’s clarify what equity release is.
Equity release is a type of loan where you borrow against the equity held in your home. You in effect, release the equity and turn it into cash. Available to homeowners aged 55 and over, the money is paid back upon death or when the borrowers move into care. The loan can be paid in one lump sum or smaller monthly payments. Interest could accrue monthly just like with a typical mortgage.
There are two types of equity release available. The lifetime mortgage and the home reversion plan.
Lifetime mortgage
The lifetime mortgage is where you borrow money based on the level of value in your home. Paid back upon death or a move into care, the lifetime mortgage allows you to remain living in the home as a homeowner. Interest can be paid back monthly to keep the loan at its original value, or it can be rolled up meaning the loan and interest are paid back upon death. A drawdown can also be chosen where funds can be requested as needed with interest added on to the amount drawn down rather than the amount available.
Home reversion
The home reversion plan sees part, or all of the home sold to a home reversion company. You can remain living there at no cost until you either move into care or pass away. As you have sold rather than borrowed, no interest accumulates as the home reversion company now owns some or all of the property. These schemes are available to homeowners aged 65 or over.
Can I pay back equity release early?
You can pay equity release back early but, in many cases, there are strict rules about how much can be paid. You could also find yourself penalised with an early repayment charge.
You have a few options with early repayment options and with lifetime mortgage equity release, you may want to weigh up what will benefit the beneficiaries of your estate the most.
You could look to make monthly interest payments leaving just the loan amount outstanding in the future. You could also consider making lump sum payments to chip away at the debt. Many lenders have caps in place for this though and will only allow you to pay back up to 10% of the total borrowed per year. Once you pay over this amount, you could be charged additional fees for early repayment.
You could also, if finances allow, pay back the full amount. However, this is likely to come with significant early repayment charges. These could be extremely detrimental to your financial situation so it would be best to speak to an equity release broker before taking out any equity release plan. A basic rule of thumb is to compare the potential early repayment charge against the interest saving. If the charge outweighs the interest, it is perhaps not worth it.
If you took a home reversion plan, you’d need to buy the sold portion of the home back from the home reversion company, but this will cost significant sums as home reversion companies purchase at below market value but sell at or above it.
How much will the charges be for paying back equity release?
Much will vary on the equity release provider. By paying the loan back early, you are doing yourself and your beneficiaries a favour, but you are reducing the income of the lender. They will want to make this loss up so will impose charges against you.
There are two common types of early repayment charge you may encounter for paying back equity release.
Fixed-rate early repayment charge
With fixed-rate early repayment charges, you’ll be made aware of exactly how much you’ll be charged to pay back any equity release early. There will be a set percentage that changes per year. For example, if you were to pay equity release back in the first year of borrowing, the charge could be 10% of the loan value. If you were to pay it back in year 5, it may be 5%.
Variable rate early repayment charge
Variable rate early repayment charges are linked to GILTS, and this can see charges vary depending on how well an investment performs. If rates drop and your pay equity release back early, your charge will be high and if rates rise, the charge will reduce. This is to cover the potential loss the lender has made.
No early repayment charges
There is now equity release products in the marketplace where they have no Early repayment Charges
Can you avoid early repayment charges when paying back equity release?
You can sometimes pay back equity release and avoid the early repayment charges. However, you’ll have to meet the lender’s stipulations for this to happen. You could steer clear of facing an early repayment charge with the following:
- Making overpayments: Some, but not all equity release plans allow you to pay up to 10% of the loan value each year. Should you pay more, a charge will apply.
- Moving house: If you move house, you can, in some cases, move your equity release plan to the new home. You may not even have to pay the loan back in full, but this will depend on the terms of the agreement and the value of the new property.
- Downsizing protection: If you choose to move to a smaller home, you can pay back the loan without any charges should you no longer need it.
- Event exemption: Joint equity release plans are common but can be complex. A significant event exemption allows the loan to be paid back without charge if one of the borrowers passes away or moves into care.
Paying back equity release is an option but it can come at a significant cost. You should weigh up the impact it may have on your beneficiaries as well as yourself and make an informed decision. That is where we can help. Our team at Mortgage Saving Experts is on hand to help you navigate the mortgage minefield and help find what is right for you. As a fee free mortgage broker we use our knowledge and expertise to find you the mortgage product that matches your needs best. Whether it be equity release or first time buyer mortgages, whether it be remortgaging or buy-to-let, our dedicated team can help. Contact us today to find out more.
