The industry definition of an equity release scheme is an over 55's mortgage, with the choice of deciding whether to make payments, and the scheme eventually being repaid upon death or moving into long-term care.
It is becoming more apparent that whereas equity release was once considered a ‘lifetime’ mortgage, now people have the opportunity to take advantage of the several repayment features centred around early repayment charges, downsize protection and voluntary payments.
Previously equity release schemes were designed to run for the rest of the person’s life, and schemes historically had potentially heavy early repayment charges, should the equity release scheme be redeemed early.
That penalty used to be predominantly linked to the change in government gilt rates and was generally capped at 25% of the capital borrowed, which ruled out equity release as a short term borrowing option.
On top of that, schemes were generally taken out on an interest “roll up” basis with very little flexibility on payment options, which meant compound interest ruled the day.
So what’s the transformation that equity release schemes have undergone more recently that could allow plans to be considered as a bridging facility?
Introduction to Voluntary Payments
Well, the news is that every equity release plan in 2022 has the facility to make voluntary payments with no penalty. These allow repayments of a minimum of 10%, or even upto 40% of the amount borrowed each year back to the lender each year with no early repayment charges.
This has presented the over 55 homeowner with an enormous amount of flexibility to manage the future balance and also the final repayment amount of their lifetime mortgage.
It is these changes that have provided the financial opportunity should people over 55 require either shorter term borrowing facilities, or schemes that allow monthly repayments.
With the inclusion of the 10% voluntary payment each year, theoretically equity release schemes can now be labelled and managed as an ‘interest only mortgage’. Hence, should the interest charged fit within the 10% allowance, then homeowners can repay the interest charged either monthly or annually to keep the balance the same throughout the life of the plan.
On the flip side, if the full 10% was utilised then the lifetime mortgage can be managed as a capital & repayment mortgage.
As an example, on a £50,000 lifetime mortgage with an interest rate of 4%, the interest charged in the first by the lender would be £2,000. The 10% voluntary payment allowance is £5,000 pa and should this be paid back to the lender, not only does this cover the interest charged, but also a chunk of capital. By repeating this process yearly, then the lifetime mortgage could effectively be repaid completely.
Additionally, being whole of market advisers, Equity Release Supermarket also have access to the Pure Retirement Freedom 40 Heritage range which has the unique ability to allow upto 40% of the original amount borrowed to be repaid each year with no penalty. If the full allowance was utilised on this plan, then the mortgage could be repaid over 3 years.
So, if you are looking for an equity release scheme that you want for only a short amount of time Equity Release Supermarket have access to plans now with voluntary payments that can now facilitate this request.
How downsizing assists lifetime mortgage early repayment
Alternatively, if you are not planning on staying in your current property for the rest of your life and feel equity release may not be right for you, think again. There are a number of equity release schemes that come with a feature known as ‘downsizing protection’.
How this feature works is that if you wanted to release funds now, and be in a position to repay in full by downsizing in future, the downsize protection feature allows you to settle the loan upon sale without incurring any early repayment charge. As such, even though it is called a lifetime mortgage, it has the flexibility to get out of the scheme with no penalty should your circumstances dictate.
Fixed early repayment charges can influence the term of your mortgage
On top of that, the old style gilt linked schemes with the potential for a 25% early repayment charge (ERC) are becoming a thing of the past. All equity release lenders now offer equity release schemes with defined early repayment charges which could last for as little as 8 years.
Similar to how a residential mortgage ERC works, equity release plans have ERC’s that expire after 8, 10 or 15 years. Therefore, if you do have a life event in the future that could results in paying off a lifetime mortgage, then you could select an ERC term to suit.
An example of this could be the Canada Life smartER range of lifetime mortgages. They operate with a 5% penalty in the first 5 years, then 3% in years 6-8 and no penalty thereafter.
Advice on the suitability of equity release schemes from an Equity Release Supermarket adviser would cover all these options & more. This newfound flexibility has changed equity release into becoming a more mainstream product – with the added bonus of having no income requirements or repayment strategy. The schemes are designed to be as flexible as they can be.
If you require further information on these topics please contact Gareth Humphreys on 01925 377331, or email [email protected].