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.
For example:
- 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.
