When considering an equity release, you may be concerned about how you could be "locked-in" with a plan that you cannot get out of. What happens if your situation changes and you want to pay the equity release back? Will there be a penalty for doing so?
You may be charged an early repayment charge (ERC) when repaying equity release early. ERC's can be very costly, but plans can be free from ERC's in just 4 years. There are also exemptions allowing you to repay without an ERC when making partial repayments, if you sell your property, or if a homeowner dies.
Let's explore some of these options in greater detail to see if a feature could best suit you.
Equity release plans with low early repayment charges
As of 2023, an equity release plan offers the shortest early repayment charges that have ever been in the market, at only 4 years.
This plan is offered by the specialist equity release lender, More2Life, on their Apex product line.
More2Life states:
You have to pay early repayment charges if you want to repay all or part of your lifetime mortgage during the first 4 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 8% of the amount repaid.
In year 2 after the start of the mortgage, the charge is 7%.
In year 3 after the start of the mortgage, the charge is 6%.
In year 4 after the start of the mortgage, the charge is 5%.
After 4 years, there is no early repayment charge payable.
The above plan offers the shortest fixed structure early repayment charges, which most of our clients prefer.
However, some plans offer variable structures, which could have a smaller ERC of £0 from day one. These structures are gilt-linked, meaning the ERC changes in line with how a gilt performs - We will look at these in more detail later in this guide.
There are also equity release plans offering slightly longer structures but could be more fav for some of the initial years
An example of this is a common structure across the market, starting at 5% of the initial amount borrowed for the first 5 years. This decreases to 3% in years 6 to 10 and has no ERC from year 11 onwards.
If you repay your equity release early (before the death of the last homeowner or when the last homeowner enters permanent long-term care) your equity release lender may charge you a penalty.
Different plans have varying ERC structures, but they will broadly fit into two categories:
- Variable - Between a minimum and maximum amount
- Fixed - Set at the outset of the plan
Equity Release with Variable Early Repayment Charges
With variable ERC's, you will not know what the penalty will be until you make the repayment. However, the minimum and maximum amounts will be written into your lifetime mortgage offer documents.
You should expect that the maximum penalty on a variable rate early repayment charge could be higher than a fixed-rate plan. But you could also benefit from a lower (or zero) early repayment charge.
Suppose you plan to repay your equity release plan early. In that case, an advisor will likely recommend you a plan with fixed early repayment charges. This will reduce your risk of incurring a large ERC.
Alternatively, it would be best to exercise any ERC exemptions available on your equity release plan (more on this later).
Let's explore a lender who offers variable early repayment charges.
All Aviva lifetime mortgages have a variable early repayment charge. Depending on the movement of gilt yields, you could have an early repayment charge of £0. However, if the gilt yields fall, you could have a maximum penalty of 25% of your original loan amount.
Aviva states:
You can repay this lifetime mortgage at any time but if you do so you may have to pay an early
repayment charge at the same time. 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.
It tends to be that older policies with higher interest rates will potentially be linked with Gilts which have fallen and that newer plans (sold in the last few years) will have Gilts that have risen or stayed broadly the same. This is a very BIG over generalisation, but broadly speaking, from what we have seen with our clients, it holds true.
Equity Release with Fixed Early Repayment Charges
The most significant benefit of an equity release plan with fixed ERC's is that you know exactly what any penalty charge will be before entering the original plan.
You will find details of your fixed early repayment charges in your Key Facts Illustration and lifetime mortgage offer.
It is common to have fixed early repayment charges for a shorter period than a variable structure, and the Apex product we looked at previously is a great example.
Let's look at another example of a fixed structure offered by Canada Life.
Canada Life states:
The loan may be repaid in full at any time. Partial repayments may also be made at any time provided
there is a minimum loan balance of £10,000 remaining.
If a full or partial redemption is made during the 8 years from the date of completion of the Lifetime
Mortgage, an early repayment charge will be payable.
During the first 5 years the early repayment charge is 5% of the amount repaid, capped at 5% of the initial
advance plus the completion fee for full repayments. During years 6 to 8 the charge changes to 3%.
Remember: There are equity release plans with Early Repayment Charges for only 4 years, starting at a slightly higher amount.
When considering an equity release plan, it is essential that you discuss with your advisor how and when you are likely to repay. For example, suppose it is before the natural term end (when the last borrower passes away or moves into permanent long-term care). In that case, you should discuss how to avoid paying an excessive Early Repayment Charge.
You could take a plan with a short early repayment charge period.
The shortest ERC period on a lifetime mortgage is currently four years. With the longest ERC period on a fixed early repayment charge plan being fifteen years.
Or you could look to an exemption that you could use to avoid paying an ERC altogether!
A way of avoiding early repayment charges with equity release is to make use of any overpayment allowances.
It is common for lifetime mortgages to include an overpayment feature allowing for voluntary payments to be made. Most plans allow for up to 10% voluntary payments per year. Some allow for more, with the market-leading plan allowing up to 40% voluntary payments each year (temporarily withdrawn from the market).
You should check the details of any overpayment allowances for any plan that you are recommended as there are differences depending on the lender.
With some lifetime mortgages, you can make overpayments when you take the plan out, while others not until the first anniversary of the plan.
Some plans also specify a maximum number of payments per year and a minimum payment amount. This does range greatly from 4 payments to unlimited. Most lenders require a minimum payment of £50, but others will specify as much as £500.
You should also check which payment options are available on your equity release. Some plans allow for payment by Direct Debit, other bank transfer, while some plans require you to make telephone card payments.
As time passes, lenders are becoming more flexible with the types of payments that you can make. So even if you were previously told that you had to pay by telephone, you might now be able to overpay by other means.
Equity Release plans with downsizing protection let you repay when moving home without incurring an early repayment charge.
Not all downsizing protections are the same though. Some allow you to avoid an early repayment charge simply when selling your home, while others only if your new property is not one which the provider will lend on.
With equity release, property underwriting is becoming more and more flexible. However, there are still some properties that are often unacceptable to most lenders. These include age-restricted homes, ex-local authority flats, freehold flats, short length leases.
If the property is acceptable, then you can port your equity release plan to your new home. If your new home is of lower value, you may be required to pay back some of the balance owed.
For example, if you moved from a £400,000 property to a £200,000 home, you may be asked to pay back half of the equity release balance. This is because the new property is half the value of the old one. It shouldn't be an issue, though, as you should have capital released from selling your current property.
Most equity release plans with downsizing protection start after five years from when your lifetime mortgage started. But Aviva has recently lowered their minimum to three years.
Aviva state:
You are moving to a property that does not meet our lending criteria and you are eligible for
downsizing protection in accordance with our terms and conditions. To benefit from downsizing
protection, you need to have held your lifetime mortgage for three years or more and you must
have kept to our terms and conditions. This is more fully explained in the Moving home section
of your terms and conditions booklet.
As you can see, downsizing protection can be a great way to avoid an early repayment charge on your equity release plan.
One of the most beneficial early repayment charge exemptions for all joint lifetime mortgages is the significant life event exemption.
Lenders offering you a significant life event exemption allow you to repay your equity release balance within the death of the first borrower or when the first borrower enters permanent long-term care.
I tell clients who are jointly applying that this gives the surviving co-owner:
- a year to grieve,
- a year to plan, and
- a year to act.
The significant life event exemption is entirely voluntary. You may wish to stay in your property should your partner no longer live in the property.
However, my experience is that you never know how you will react to the situation until it is put before you. And having the flexibility to repay while avoiding an early repayment charge could be very useful.
Similarly, you may be planning to repay upon the death of the first co-owner. Quite often, I find that couples are happy to stay in their home while they are both there, but that the surviving co-owner doesn't want or have the financial means to stay on their own.
For any joint equity release applications, having a plan with a significant life event exemption is often key.
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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