How do early repayment charges work for equity release?
If you repay your equity release loan early, you could be hit by an early repayment charge. Here’s everything you need to know.
Equity release allows homeowners aged 55 and over to access the equity that has built up in their home, without selling up and moving house.
Paying off your loan early will reduce the amount of interest that you need to pay.
Early repayment charges vary but may be up to 25% of the outstanding loan in some cases.
Unbiased can connect you with a trusted mortgage broker to help you navigate equity release repayments and fees effectively.
How does equity release work?
Equity release offers homeowners aged 55 and over the opportunity to tap into the equity that is locked up in their property.
This allows you to access tax-free funds without the need to sell up and move home.
The money you raise can be spent however you wish, whether that’s to bolster your retirement income or for specific expenses like home improvements or a new car.
Can you pay off equity release early?
If you have a lifetime mortgage - by far the most common form of equity release - and your lender is a member of the Equity Release Council, you will be able to pay some or all of your loan off early.
However, it's crucial to understand the details of your agreement and the charges associated with early repayment.
When you settle your equity release ahead of schedule, you may be hit with an early repayment charge (ERC).
This is intended to compensate the lender for the interest income they would have earned, if you had the loan for its full term.
ERCs can vary, depending on the terms of your equity release agreement and your lender's policies.
In some cases, they could be as much as 25% of the amount borrowed.
There may also be other fees associated with paying off your equity release early.
These could include legal fees, admin charges for processing the early repayment, and valuation fees.
How much does it cost to pay off equity release early?
Early repayment charges can vary depending on the lender's approach.
Some lenders employ a fixed-rate method, establishing the charge upfront.
Other lenders use a variable charge. Here, the early repayment charge will depend on the value of gilts (government bonds which equity release providers invest in).
If gilt yields have risen since you took out the loan, there may not be a charge to pay.
However, if they have fallen, your lender will demand a charge that is linked to the scale of the drop.
However, these charges will normally be capped at 25% of the amount borrowed.
It’s important to note though, that you may be able to find some providers that do not impose early repayment charges.
Equally, you should be aware that like ordinary mortgages, you may be able to make some overpayments without incurring a charge - such as 10% of the loan each year.
Why should you pay off equity release early?
Most people will normally only pay off their lifetime mortgage when their property is sold - either when they die or move into a care home.
But as interest rolls up during the course of the loan, the longer it lasts, the more expensive it becomes.
This can substantially reduce the amount of money that you are able to leave to loved ones.
That means some borrowers may decide to either make a partial repayment or pay the loan off early, to reduce the amount of interest that is eventually payable.
How can I pay off equity release early?
If you’ve got a lump sum that you don’t think you will need, you could use it to pay off your lifetime mortgage early.
The first step is to review the terms of your agreement to find out whether any early repayment charge will be payable and if it is, what that charge will be.
It's also a good idea to chat with a qualified mortgage broker or financial adviser.
They can help you determine your options, weigh the potential costs and benefits, and navigate the repayment process smoothly.
If you decide to repay your loan early, there are a number of options open to you. You might make one lump payment, regular payments, or pay back the interest.
Some equity release plans also include downsizing protection options.
This means you can pay off your loan early without incurring extra charges if you decide to downsize to a smaller home.
Seek expert equity release advice
Paying off an equity release plan early could save you thousands in interest and increase your inheritance for your beneficiaries.
However, before you do, it’s important you understand the impact of any early repayment charges or additional fees that you may need to pay.
If you aren’t sure whether it’s the right option for you, it’s important to seek guidance from a qualified professional.
Let Unbiased match you with a mortgage broker for expert financial advice to help you make informed decisions that align with your long-term goals and ensure the best outcome.
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