Can you pay back equity release without incurring early repayment charges?
You can pay back equity release however depending on the lender and type of lifetime mortgage you have, early repayment charges could apply. Some equity release providers let you make early repayments after a fixed number of years. Others let you repay a percentage of the loan each year.
It’s therefore important to discuss pay back options with your adviser before going ahead, especially if you think early repayment may be an option.
Paying off equity release early
Lifetime mortgages are considered long term financial solutions. Suitable for homeowners looking for tax free cash, without the worry of monthly repayments. Situations can change however which may mean you need to sell your property earlier than intended.
The good news is that schemes have evolved and now include a number of options for early repayment.
What are the early repayment charges on equity release schemes?
Early repayment fees on equity release schemes are usually charged in the following ways:
- As a fixed percentage of the original equity loan
- As a variable charge linked to long term savings known as gilts (government bonds)
Also, some lenders set a maximum age by which time they will not charge any fees or a fixed number of years.
Fixed repayment charges
The amount you are charged with fixed early repayment charges will depend on your scheme and how long you have had it. Many companies will charge an initial amount for the first few years that reduces over time. For example:
- 5% of the original equity loan if you repay within the 1 to 5 years
- 3% of the original equity loan if you repay within the 6 to 8 years
- 0% thereafter
Variable gilt based repayment charges
Gilt early repayment schemes are a little more complicated as the amount payable depends on whether the gilt rate is up or down. If the gilt rate remains the same or is higher than when the loan was taken out, the repayment charge may be low.
If the rate is lower however, the cost of repaying your loan could be thousands of pounds. The only guarantee is that the early repayment charge cannot exceed 25% of the original loan.
What makes it more complicated is that these rates change daily, so timing is everything.
Can you get equity release with no early repayment charges?
Finding an equity release scheme with no early repayment changes will be difficult but schemes are available that either:
- Allow you to repay the loan and interest after a fixed period
- Allow you to pay back a percentage of the loan annually
- Offer downsizing protection allowing you to repay the loan if you move
How does equity release with a repayment option work?
Early repayment is possible with some equity release schemes. Typically, you’ll be allowed to repay between 10% or 12% of the original loan annually, or a percentage of the interest accrued. Payments are usually voluntary, meaning you won’t be forced to make repayments however acceptance may be based on affordability
This simply means that in order to qualify for some of these schemes, you may need to prove you can make repayments. This is different to regular equity release schemes where the loan and interest are repaid after death, therefore affordability isn’t relevant.
What is downsizing protection?
Some equity release schemes include downsizing protection. This allows you to repay your loan without penalty if you move to a property that doesn’t meet the providers lending criteria.
So, for example with downsizing protection, you could move home to a cheaper property and repay the loan without being charged.
The downsizing protection option may only be available after a certain number of years so again it’s important to discuss this with your adviser before going ahead.