Equity release offers retirees the opportunity to release equity built up in their property and receive payments to help fund their retirement. For many retirees, equity release helps them to afford more in their retirement with less financial stress.
For many people who choose equity release, the standard repayment practice works for them. Equity release is paid off with the proceeds of the house sale once you pass away or enter long-term care. However, some people may want to pay off some or all of their equity release early, and knowing whether this is possible before you take out an equity release plan is key.
The information on this page should not be considered as financial advice. If you are unsure what’s right for you, please make sure you speak to a financial adviser.
Can you pay back equity release early?
Yes, you can pay back equity release early. However, this often comes with additional charges. Each equity release product will be different and have certain regulations on how much you can pay back, as well as any fees. So, if you’re unsure, you should check with your provider.
What options might you have for paying off equity release early?
Similar to a mortgage, you have multiple options for paying off equity release early. You can pay back all of the loan in one go, pay off the interest, or make smaller, regular payments. The availability of these options will depend on your equity release provider and the product you’ve chosen
1. Interest-only repayment
With an interest-only repayment, you only pay the interest charges, not the loan itself. This means the total owed is the original amount you borrowed again. As equity release is mainly done with compound interest, the interest-only repayments can greatly reduce the total amount owed when you pass away or move into long-term care, and it comes to selling the house.
You could pay the interest off in monthly repayments or larger sums. It’s very much up to your preference and the lenders options on how you choose to pay back the interest. This can vary from lender to lender, which your equity release adviser will be able to discuss with you.
2. Partial repayment
If you come into a sum of money or have saved up, then you may want to make a partial repayment on your loan. You may want to do this to reduce the total loan amount or to reduce the interest charges.
Some equity release providers may have an annual cap on how much you can repay, often 10% of the initial sum borrowed. There may also be an early repayment charge for partial repayment, which you should check with your lender or equity release broker.
Since the 28th of March 2022, anyone who has taken out a lifetime mortgage that meets the Equity Release Council Standard has been able to make partial repayments with no charges. This only applies to lifetime mortgages taken out after the 28th of March 2022.
3. Pay back in full
If your circumstances change, and you are downsizing or moving and don’t wish to move the equity release plan with you, then you may want to repay the loan in its entirety.
As you are effectively ending the loan early, you may incur considerable early repayment charges. When you look into taking out an equity release plan, always check what the early repayment charges would be for full repayment, as it’s best to be prepared for any circumstance changes, even if you don’t plan for them!
Early repayment charges and equity release
Early repayment charges are included in most loan types, including equity release. This is because the lender calculates the loan amount and interest rate on the basis that it will be repaid over the agreed timeframe. If you choose to repay all or some of the loan early, the lender will likely need to recover the interest charges they would have received or the cost of reinvesting that money, hence why you may be charged early repayment fees.
There are two types of early repayment charges, fixed and variable.
Fixed repayment charges
Fixed repayment charges, sometimes referred to as defined repayment charges, are determined at the point you take out your equity release product. They may be calculated at a percent of the loan, a fixed sum, or even a decreasing sum depending on the loan amount left. When you take out your equity release product, your lender or equity release broker will make these clear to you. Always ask to see your early repayment charge illustration, even if you don’t intend on making them, as you never know when circumstances could change.
Variable repayment charges
Variable repayment charges are linked to the Government Index Linked Treasury Stocks (GILTS). As GILTS are based on a fixed interest rate return, an equity release provider that has invested your money in GILTS may lose out on the yield, and so the variable repayment charge will reflect the loss or gain.
If GILTS rates go down, your early repayment charge will increase to compensate for the potential loss, but if GILTS rates go up, your early repayment charge will fall.
Need help with equity release?
Releasing equity from your home isn’t an easy decision. For a free and impartial chat, speak to one of our friendly advisers.
You can also order a free Equity Release brochure.
When might you not have to pay early repayment charges for equity release?
You might not have to pay early repayment charges in a few situations.
1. Moving home
If your equity release product is from a lender approved by the Equity Release Council, then you will be able to move house without needing to pay charges. Therefore, if you choose to sell your home and move somewhere new, you don’t necessarily have to pay back your loan, depending on the lender. Lenders will most likely want to approve the new house to ensure that it will hold value for when you pass away, to ensure that they won’t enter negative equity.
2. Downsizing
If the property you are moving to doesn’t meet the equity release providers requirement, or your new property value is significantly lower, you may be able to pay off some of the loan early without any charge. If your lender offers a downsizing protection clause, then you won’t have to pay early repayment fees. If your lender doesn’t, it’s still worth checking with them, as they may offer a fixed repayment charge when downsizing.
3. Voluntary overpayment
If your equity release product is from a lender approved by the Equity Release Council, then you will be able to move house without needing to pay charges. Therefore, if you choose to sell your home and move somewhere new, you don’t necessarily have to pay back your loan, depending on the lender. Lenders will most likely want to approve the new house to ensure that it will hold value for when you pass away, to ensure that they won’t enter negative equity.
As referenced above, since the 28th of March 2022, anyone who has taken out a lifetime mortgage that meets the Equity Release Council Standard has been able to make partial repayments with no charges.
Lifetime mortgages taken out before the 28th March 2022 will often have a fee attached to overpayment, which can be a percentage of the loan, a fixed sum, or linked to GILTS as discussed earlier. However, some historic lifetime mortgages may also allow a voluntary overpayment without any charges attached. There is often a payment cap on voluntary overpayments, which will vary from lender to lender.
Are you considering equity release?
If you’re considering equity release, then it’s important to understand early repayment charges amongst a multitude of other considerations. An impartial equity release advice service will help you to understand what is and isn’t right for you when it comes to your retirement.
Why not speak to one of LV=’s equity release advisers to learn more? Your retirement is a big phase of your life, and it’s important to make the right financial decisions for you. Request a call today.