Equity Release With Repayment Option

What is equity release with repayment option?

EquityThe difference between the value of the property and the amo... release involves a big decision. You might be put off by the thought of being stuck with a fixed and inflexible plan that you must shoulder for the rest of your life.

If that’s your worry, you might want to look at the solution offered by the possibility of paying off equity release early. Different providers will have their own rules and policies about repaying any equity release funding earlier than scheduled. Some might limit the amount you can repay, while others might come with a financial penalty by way of equity release early repayment charges.

What is equity release?

The generic term equity release is typically used to describe two of the main ways a homeowner can unlock the cash value otherwise tied up in the home that they have owned for a number of years. The cash is realised through a loan which can be paid as a lump sum, in several instalments, or as a combination of both.

The two main types of equity release, therefore, are either:

Lifetime mortgages

• these are like regular mortgages in so far as the cash advance is made against the security of the home – in which you continue to live until you die or enter alternative long-term care;
• the difference, though, is that you may opt not to pay any monthly interest on the loan but instead allow it to roll over until the end of the lifetime mortgage agreement when the principal is also repaid;

Home reversions

• with home reversion, the provider purchases the whole or a part of the home in which you continue to live;
• payment for that purchase is made either by way of a single lump sum payment, a regular income for the rest of your life, or a combination of the two.

In this article, we shall be looking at the possibilities and implications of equity release lifetime mortgages with early repayment options. When considering equity release, it is essential to understand the seriousness of any such transaction and the need to seek independent financial advice before making your decision.

Can I overpay on my lifetime mortgage?

As with many other types of mortgage borrowing, you can make additional overpayments of the agreed monthly repayments on your lifetime mortgage. Different lenders may accept payment through various methods – such as bank transfers, direct debit, standing orders, cheques, or telephone card payments – and you may need to check precisely what payment your lender accepts.

Typically, the terms and conditions of your lifetime mortgage will let you make overpayments up to a certain amount free of charge. However, that freedom is generally limited to overpayments representing a percentage of your borrowed amount. For example, that might be 10% of the mortgage value each year. In other cases, it might be 12%. At the same time, some lenders might even allow you to overpay up to 40% of the mortgage value without attracting any financial penalty.

By overpaying the amount of monthly interest charged, you are reducing the outstanding capital balance and have less to repay when the lifetime mortgage ends.

Can I pay back equity release earlier than agreed?

If you are paying off equity release earlier than scheduled – either through monthly overpayments or repayment in total – you are changing the initial intention of a lifetime mortgage. That intention, of course, was for the equity release lifetime mortgage to run until your death or move into long-term care – and that was the time originally scheduled for the repayment of the principal sum borrowed and any outstanding accrued interest.

You may incur equity release early repayment charges by changing those original intentions.

Why would I repay equity release early?

An equity release with repayment option UK allows you to reduce or settle what can be a sizeable debt.

If you have realised extra cash from selling other property, have received an inheritance, or have accumulated sufficient cash in your pension fund, paying off your equity release early would give you more funds to leave your loved ones as their inheritance.

Alternatively, you might make early repayment of your equity release so that you can move home and buy another property free of any debt your present home has been used to secure.

What are Early Repayment Charges (ERCs) on an equity release?

Although your equity release lender may have granted certain allowances for the overpayment of monthly interest, if you want to exceed that overpayment or repay the equity release loan entirely, you are likely to incur Early Repayment Charges (ERCs).

ERCs are imposed to compensate the lender for the losses incurred due to your changing the original equity release loan agreement terms by repaying the advance earlier than scheduled.

Some equity release agreements have in-built terms and conditions for fixed-rate ERCs – giving you the considerable benefit of knowing exactly what it will cost if you decide to exercise your option for early repayment. You will not be presented with any unwelcome surprise if you subsequently choose to repay your equity release early.

Otherwise, you will need to know that different lenders may exercise widely different policies and rules concerning their early repayment charges on equity release plans. Therefore, you will do well to establish exactly how these charges are likely to be calculated before you agree to the terms of any equity release agreement.

Next steps

Any decision to seek equity release on your home requires careful consideration – not least because of the potential conditions, restrictions, and early repayment charges likely to be associated with any subsequent decision to repay the borrowing and prematurely end the agreement.

To ensure that you have considered all the possibilities and implications, you might want to consult independent financial advisers such as us here at NeedingAdvice.co.uk for our expertise and experience in all matters relating to equity release.

FAQs

Can I pay off the equity release early?

Yes, if you have a lifetime mortgage which is one of the most widely used equity release products, you can make the repayments early. In this case, you will usually be charged a fee called an ‘early repayment charge’ (ERC), but some lenders offer no upfront fees.

The amount of the ERC depends on the type of equity release product you have taken out, the length of time you take to repay the money and whether you use the full amount available to you.

It is always better to hire equity release brokers before starting your application.

What are the eligibility criteria to qualify for the equity release plan option?

To qualify for an equity release plan, you must meet an age requirement that is set by the lender. The minimum age varies from lender to lender but generally ranges between 55 and 75 years old.

You also need to own your home outright and have sufficient funds to cover the costs of paying off the equity release loan.

If you have other debts secured against your home, they should be paid off first. If you don’t have enough cash to clear those debts, then you won’t be able to get an equity release plan.

If you have more than one property, you may only apply for an equity release plan on one of them.

You cannot apply for an equity release scheme if you live in social housing or rent your home.

There are many other criteria that you need to keep in mind while applying for any equity release plan. You need to hire a mortgage broker to help you find the best deal from an equity release lender.

What are different equity release schemes?

The two most common equity release schemes are lifetime mortgages and home reversionary loans.