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Repaying an Equity Release Mortgage Early
One of the primary concerns with an equity release mortgage is whether you have the flexibility to change the agreement if your circumstances make it possible to repay early.
There can be a lot of disinformation about early settlements.
Still, there are options to pay back an equity release product, perhaps if you receive additional income or decide to sell your property.
Equity Release Introduction
Equity release plans are a type of borrowing product for people aged 55 or above who want to raise finance against the equity in their home - normally to top up their pension income or finance other retirement plans.
Most applicants own a home outright but don't have a generous pension scheme, so they can use equity release to borrow fairly large amounts without making any repayments.
The contrast with conventional mortgages is that the lender holds security over your property and will sell it when you go into care or pass away.
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Can I Pay Back an Equity Release Mortgage Early?
Contrary to popular opinion, you can pay back an equity release mortgage, but these products are designed as a lifetime loan, so it isn't always the most straightforward process.
Equity release schemes don't have fixed terms, so you must know what an early settlement might cost in additional fees before making any decisions.
Repayments on Equity Release Explained
Usually, there are two reasons your equity release loan might be repaid.
If you die or move into long-term care, the lender will sell the property and use the proceeds to settle the balance owing.
Joint applicant loans are based on the last surviving occupant, so you won't stand to lose the right to live in your home if one person passes away.
You might decide to repay the full loan early but will often need to pay an early repayment charge depending on how long you have held the product and the lender's policies.
What is the Cost of Equity Release if I Repay Early?
Early settlement charges vary between lenders, and some charge a fixed percentage of the total borrowed, which reduces the longer you have had the equity release product.
An example might look like this:
- Payments in the first five years incur a 5% penalty.
- Repayments between years six and eight incur a 3% charge.
- Settling the loan after eight years does not require any extra fee.
Other equity release schemes have a 10-year period in which early settlement fees apply, and the lender reduces the percentage of the charge year on year.
The cost of an early repayment charge can be more complex and might depend on the long-term interest rates associated with other government-based products.
Can I Get an Equity Release Mortgage With an Early Repayment Option?
Yes, there are lifetime mortgages and equity release schemes with flexible options to allow you to make repayments, whether regular instalments or occasional deposits.
Although the norm is to repay the interest, you can take out an equity release plan that permits repayments towards the capital balance, usually limited to 10% of the total borrowed (although sometimes up to 12%).
If you would like an equity release loan with early repayment options, the lender will need to run an affordability check to determine whether you have the income to pay back the loan and may charge higher interest rates.
What Are the Benefits of Settling an Equity Release Loan Early?
There are many circumstances where you might decide that you want to repay an equity release loan sooner than you had anticipated.
- You decide to downsize or relocate somewhere with much lower property prices.
- You move in with a relative and no longer require your property.
- Your retirement income returns a larger return than you had expected.
- You inherit funds or receive an investment return.
The benefit of settling early, where possible, is that the lender will not retain any charge on your property.
When you pass away or go into care, you can leave your home to whomever you wish in your will.
Downsides include the potential to incur hefty settlement fees that might impact your finances, so it is important to understand the terms of your equity release plan from the outset.
What is the Cost of Equity Release for an Early Repayment?
Settlement charges vary, and there are products without any early redemption charge, although this is less usual.
In some cases, the lender will specify a maximum age, and if you reach this point, you can repay the loan without paying any extra fees.
That might mean that you need to pay an early settlement charge if you want to repay the loan in the first five years, but no charges apply after that.
What Does Downsizing Protection Mean in Equity Release Schemes?
Some lenders offer a feature called downsizing protection, which means that after five years, you can sell your property and move somewhere smaller, normally without a penalty or with a lower administrative charge.
You can borrow against your current home to raise cash in the short term and downsize to pay it back once five years have passed (if you wish).
For example, you might take out an equity release mortgage of £150,000 against a home worth £400,000.
Five years later, you could sell the home, pay back the debt and interest accumulated, and purchase a smaller property with the balance.
Why Equity Release Advisers Are Important in Choosing the Right Equity Release Schemes
Equity release schemes can be a very attractive way to finance your retirement, but they can be tricky to repay early, and the costs of doing so can be steep.
It is always advisable to speak with a whole-of-market broker who can steer you through the terms, recommend products that suit your requirements, and suggest alternatives where another option might be more suitable.
Revolution Finance Brokers are wholly independent and will be happy to discuss your needs and walk you through the options for repaying an equity release loan early.
You can sell your home if you have an equity release plan, although the correct course of action might depend on what the new property is worth.
Some equity release schemes will be happy to approve a new property and transfer the product from one to the other - although they'll need to conduct a valuation first.
If you are downsizing and buying a much cheaper property, the lender might not wish to transfer the loan or might reduce the amount they are prepared to lend.
You could then repay some of the loan early with the sale proceeds but need to be mindful of the potential for early repayment charges.
There aren't necessarily higher interest rates associated with an equity release early settlement, but you may need to cover extra charges levied by the lender.
More flexible equity release schemes may charge slightly higher interest rates to offset the risk to the lender that you will decide to repay the debt.
The repayment process works a lot like it would if you had moved into care and the lender needed to sell the home.
All of the interest accumulated to date will be added to the capital borrowed, plus early repayment fees to arrive at a settlement figure.
Once you have repaid the debt, the loan account is closed, and the lender will release the security held against your property.
If you think there is a likelihood that you'll want to move home, it's worth speaking with an independent equity release adviser to assess the appropriate options.
You can move home with an equity release mortgage, transfer it to a new property, or repay the debt.
Still, the early repayment costs may not be viable, or another form of financing could be more advantageous.
Interest-only equity release plans allow you to pay the interest element of the debt monthly or make instalments when you wish to reduce the overall debt.
Normally, that won't include any repayment of the capital (either the lump sum borrowed or the total drawn down from your facility) but just the interest.
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The content included in our articles, blogs, web pages and news publications is based on information accurate at the time of writing. Note that policies and criteria can change regularly throughout the UK mortgage lending market, and it remains essential to contact the consultation team to receive up to date guidance. The information included on the Revolution Brokers site is not bespoke to any circumstances or individual application scenarios and therefore is not intended to be used as financial advice. The content we share is designed to be informative and helpful but cannot be relied upon to provide individual advice relevant to your mortgage requirements. All Revolution team members are fully qualified, trained and experienced to provide mortgage advice of an independent nature.
We collaborate with lenders and providers who are regulated, authorised and registered with the Financial Conduct Authority (FCA). Should you require specific mortgage borrowing types, some products such as buy to let mortgages may not be FCA regulated. The Revolution team can provide further information about regulated and unregulated lending as required. Please remember that a mortgage is a debt which is secured against your home or property. Your home can be at risk of repossession if you do not keep up with the repayments or encounter any other difficulties in managing your mortgage borrowing responsibly. This also applies to any remortgage or home loan secured against your property, including equity release products.