Anyone considering taking out equity release has many choices to make.
One of the biggest & most expensive if not advised correctly could be on early repayment of an equity release scheme.
However, before we delve into the main differences between current equity release schemes we briefly look at why early repayment charges exist & how they can arise.
Primarily, equity release is designed to run for the rest of your life.
There is no fixed term & the scheme will continue to run until the second person has died or moved into care.
At that point the property is usually sold, with the equity release provider being repaid first from the proceeds & any remaining balance is passed into their estate.
With the earliest age of starting one of these schemes being 55, the total term could well be in excess of 30 years. For this reason lenders hedge their bets in order to recover any potential early repayment which may cost them significantly.
Obviously life expectancy for everyone differs.
The Financial Services Authority (FSA) use average life expectancy data in order to provide the basis of a lenders key facts illustration (quote).
It is with this same information that lenders will also formulate their early repayment charge structure.
We can relate such charges with a conventional mortgage, whereby upon early repayment within a specified term the borrower will incur an early repayment charge.
So, upon what circumstances would an early repayment charge exist?
This could be for a number of reasons: -
- Sale of property
- Moving into long term care
However, not all the aforementioned would incur a penalty upon early repayment.
Equity release providers would not invoke a penalty on death or moving into long term care. Additionally, where some lenders invoke a charge for a set period of time, once this term has expired there would be no penalty thereafter.
However, there would potentially be a penalty if the property was sold during the lifetime of the owner for example if an inheritance was received or downsizing occurred & the scheme was repaid as a consequence.
In addition to the early repayment charge the lender could also levy an administration fee which can vary from zero to £300.
How do lenders calculate the early repayment charge & how much can it be?
The answer to this varies significantly & this can be evidence with the following simplified table: -
|Aviva||Remainder of the plan term||Charge linked to performance of gilts.||Maximum 25% initial advance|
|Hodge Lifetime||10 Years||Percentage penalty based number of years||5%|
|Just Retirement||Remainder of the plan term||Depends on the FTSE UK gilt yield||Maximum 20% of total advances|
|LV=||10 Years||Percentage penalty based number of years||5% yrs 1 to 5, 3% yrs 6 to 10|
As you can see, all equity release schemes have the inclusion early repayment charges & if you are considering early repayment it maybe a case of damage limitation or manipulation of repayment date that could avoid potential penalties.
From experience, this aspect of equity release penalties I will cover in a separate article to follow & can provide advice on methods of alleviating these penalties from lender to lender.
This will also include topics such as: -
- Options on downsizing
- Gilt rates & where to find current gilt yields
- Information on repayment to existing equity release borrowers who are looking for additional funds or achieve a lower interest rate
- Possible avoidance of early repayment charges – lender by lender
If you have any questions or require further information on the subject of equity release early repayment charges, please email [email protected] or contact Mark on freephone 0800 678 5159.