The short answer is 'Yes' - however it does come with certain caveats. This question is one of the most common we get asked here at Equity Release Supermarket for one of two reasons...
Firstly, you may have had a lifetime mortgage for several years, looking to borrow a little extra and be aware that there are now much better rates available in the market. By switching to a new plan, you could potentially save £000s over the remainder of the life of your mortgage.
The question is, whether it is worth switching plans, given the potentially onerous early repayment charges you may have to pay in order to switch plans?
Secondly, you may be considering taking out a lifetime mortgage with the intention of repaying it in a few years' time and want to understand the costs involved if you do. You have events planned in the future (e.g. retirement) that may allow you to clear the lifetime mortgage sooner than anticipated.
Let's look at each scenario in turn.
Switching plan to potentially save money
Lifetime mortgages typically offer fixed rates for the whole term of the plan, which can be 30+ years and from a provider's perspective, that is a long time to wait before they see a return on the money they have lent.
So, when lenders are calculating their profitability models, they assume that the plan will not be repaid early but build in early repayment charges (ERCs) to ensure that if it is, they still make the return on their investment.
We are all used to the concept of early repayment charges, as they are a common feature of fixed rate residential mortgages, but they differ greatly in design when applied to lifetime mortgages.
Many older equity release plans came with ERCs that were variable but capped at 25% of the amount borrowed. They were calculated using the prevailing government gilt rate which varies daily, depending upon demand and the economic health of the country.
If you have an older lifetime mortgage where the ERCs are based on government gilts and you are wanting to switch plan - then the devil is in the detail and timing is key. A typical example of these ERCs are with Aviva (formerly Norwich Union) and it is important that expert advice is obtained in accessing each of them individually.
We recommend that you speak with an expert adviser at Equity Release Supermarket who will be able to assess if switching plans is right for you. They will conduct a switch analysis, to calculate the break-even point and therefore gauge whether transferring is viable.
We also offer a switch plan calculator which will give you an idea if it is going to benefit you financially.
Considering a lifetime mortgage with plans to repay it in a few years' time
The lifetime mortgage market has made huge strides forward in the last few years and has improved in many areas, which is the reason for its continued success.
Interest rates have fallen to all-time lows and new features and benefits are now available across the market that offer flexibility and control where you are able to tailor a plan to meet your individual needs.
Lenders have responded to the criticism they received over early repayment charges and many now offer much better terms on their ERCs, such as -
- Tapered redemption charges - Lenders are currently offering ERCs where they can expire over an 8 or 10 year period. So, if you took a plan with 8-year ERC's the penalties would work out at 5% for the first 5 years, 3% for the next & then no penalty thereafter.
- Portability - If you want to move home, you can take your lifetime mortgage with you without penalty as long as the next property meets the lender's criteria.
- Downsizing protection - If you need to sell your house and move, for example due to the death of your partner, some lenders now allow your lifetime mortgage to be repaid penalty free from day one.
Alternatively, if you have the income, you could take out an lifetime mortgage with a voluntary payment option and make overpayments of up to 15% p.a. of the original amount borrowed. This would enable you to choose how much & when to make repayments, if at all and with no penalty.
The other advantage is there are no affordability checks as the payments are voluntary, which means no underwriting and simpler acceptance.
By adopting a personal repayment strategy, you could effectively manage the plan on an interest-only basis, thus keeping the balance level, or repay capital and interest, thus reducing the lifetime mortgage balance to zero over time (subject to the lender's terms).
What should I do next?
Whether you already have a lifetime mortgage or are considering taking out a lifetime mortgage with a view to repaying it in the future, your next step should always be to speak to an expert, Equity Release Supermarket adviser.
Call us on freephone 0800 678 5955 or email [email protected] to get in touch.