You can repay equity release early (the most popular plans being lifetime mortgages), but depending upon the lender, the type of plan and when it started, early repayment charges (ERCs) could apply. These may be onerous, making it unrealistic to get out of equity release early. That said, many new plans now offer fixed-term ERCs, making early repayment both practical and achievable.
Why do equity release lenders apply early repayment charges?
Historically, one of the main criticisms made of equity release and lifetime mortgages, were the potentially hefty early repayment charges, making it almost impossible to repay a plan and get out of equity release early (as plans are usually repaid when you die or move into long-term care).
As equity release providers are lending for potentially many years, in some cases in excess of 40 years, they need to set their long-term borrowing plans accordingly. Equity release on the face of it may seem very profitable to lenders, however for a large initial outlay it can be many years before they receive their capital & interest in return. To ensure their profitability, lenders must make contingencies in case of early repayment.
So, like any mortgage lender, equity release providers need to include a penalty on early repayment of a plan. To many, this would not be seen as an issue as we may have all experienced some form of ERC with our mortgage companies in the past. The difference between residential penalties and equity release penalties are the basis of, the size, and duration that the penalties can be levied over.
What early repayment charges can I expect to pay?
There isn’t a simple answer to this question as it really does depend on whether you already have an equity release plan and who your lender is.
For existing borrowers who have had a plan in place for a number of years, the majority of lenders have applied the Aviva formula of using government gilts as the basis for their early repayment charges – which could be up to 25% of the amount initially borrowed. These included lenders such as more2life, Pure Retirement, Legal and General and Just Retirement.
It’s also important to understand what the percentage penalty is based upon. Some lenders can charge their penalty on the amount that is repaid, some on the original amount that was borrowed. There is a clear distinction that borrowers should be aware of.
However, there are a couple of exceptions to this rule including LV= (Liverpool Victoria) - who use a fixed penalty of 5% of the capital borrowed in the first 5 years to 3% in the next 5 years, then nothing thereafter and Hodge Lifetime – who use a combination of a fixed rate penalty over 5 years and swap rates (which relate to the long term effect of interest rates). However, they do have the advantage that if you move after day 1 of the start of your plan, then there are no early repayment charges to pay.
For equity release customers looking to switch or repay their plans who took out a gilt related plan in the past, it could be bad news.
You could hedge your bets, but as the phrase goes...let the buyer beware. For instance, with gilts rates currently at low levels, could now be a good time to consider a gilt related equity release plan over the medium term?
The reason for taking out such a plan now would be the fact that these gilt related ERC equity release providers will not levy an ERC should the gilt rate have risen since the plan was taken out. In fact, companies such as Aviva won’t charge an ERC if the gilt rate remains the same or even falls by a margin of 0.12%.
It is a gamble, as there is still much uncertainty in the economy, but the markets would expect that gilts are sure to go back up in the future when interest rates may rise. When though, is the golden question.
So, gauging which equity release scheme is the best doesn’t all boil down to the lowest interest rate. A combination of assessing your future plans and how much, and when you actually need your money can be just as important.
Afterall, what is the point of taking out an equity release plan with a low interest rate, when upon early repayment you could be charged an enormous penalty of up to 25% of the amount you originally borrowed! It may be better to pay a slightly higher rate, with the knowledge that you either have no early repayment charge to pay or know what is from the outset.
For new borrowers, the picture with early repayment charges could be very different as many lenders have moved to offering fixed-term ERCs, but gilt based ERCs can still apply. For example, below are some of the ERCs that are now available -
- 8 Year - 5% for the first 5 years of the plan. 3% for the next 5 years & none thereafter.
- 10 Year – 5% years in 1-5, then 3% years 6-10 & none thereafter.
- 15 Year – 10% in year 1, down to 2% of the balance outstanding in the 9th year.
Thereafter, 1% in years 10-15 and finally no early repayment charge after the 15th year.
For new borrowers, the combination of fixed-term ERCs, alongside the ability to make monthly interest repayments and capital repayments, plus low interest rates, could make lifetime mortgages a viable way to borrow in the shorter term for older homeowners, who may find they are no longer accepted for other types of shorter-term borrowing such as personal loans (or indeed for residential mortgages) because they cannot pass the lenders’ affordability tests.
This idea really does blow apart the thinking that lifetime mortgages should only be considered for those looking to borrow larger amounts of money over the remainder of their lives. But before you consider using a lifetime mortgage for shorter term borrowing, it’s vital that you talk this through with your Equity Release Supermarket adviser to understand if this is the best solution for you.
Will I always have to pay early repayment charges?
The simple answer is ‘no’ and it depends upon your personal circumstances.
For example, with all the lifetime mortgages we offer, you have the right to move home and ‘port’ your equity release plan with you. While you are not looking to repay a lifetime mortgage early in this situation, you are free to move home without penalty.
Many plans now also offer ‘downsizing protection’ which enables you to sell your home and downsize within 1 day - three years of the death of your partner or following their move into long-term care. Again, this is offered penalty free by lenders, allowing you to get out of equity release early.
So, as you have gathered reading this article, equity release and early repayment charges is a complicated subject. For existing borrowers looking to switch their plans to a better rate (and potentially save thousands over the life of their plan), or considering repaying to get out of equity release, then your Equity Release Supermarket adviser will undertake a full review before recommending if you are financially better off switching, staying or repaying. You can also use our switch plan calculator and get an idea for yourself.
For new borrowers, with so many plans to choose from, there’s a lot to consider. But don’t worry, your Equity Release Supermarket adviser is the expert when it comes to early repayment charges. Why not give them a call today on 0800 802 1051 or email them using [email protected].