Equity release schemes have become increasingly popular in recent years as more and more retirees look for ways to supplement their income in retirement. But can you pay the equity release back if you need to? And what are the consequences of doing so? In this blog post, we will explore the options available to those who want to pay back their equity release scheme. We will also discuss the pros and cons of each option.
You might be concerned that you’ll be left with a set mortgage for the rest of your life when it comes to equity release. When discussing financial issues with clients, frequently asked if they are able to make payments can be made against an equity release.
You may make partial, or full payments at any time using an equity release plan authorized by the Equity Release Council. Some plans enable you to make payments without any charges, but others will entail additional fees.
This is why you should use equity release plans that have been certified by the Equity Release Council.
Below is a comprehensive guide detailing any charges you may incur if choosing to repay your equity release.
Is it necessary to make payments towards my Equity Release plan?
Throughout this article, we’ll concentrate on the most frequent type of equity release plan, the lifetime mortgage.
A lifetime mortgage is a loan secured against your property, which is repaid when the last surviving borrower dies or moves into long-term care. No monthly repayments are required, as the interest is added to the loan amount and only paid off when the property is sold.
How can I make partial payments on my Lifetime Mortgage?
If you have a lifetime mortgage, partial repayments can be made without incurring any Early Repayment Charges (ERC) up to a particular pertcentage of the loan. Usually up to 10% each year, with other plans this could be up to 12%, and others 40%. This is because lifetime mortgages are typically interest-only loans, so repaying the loan amount does not reduce the overall debt. You can make partial repayments as and when you want, up to the maximum allowed by your lender.
You also have the option to make payments beyond just the interest, which allows you to reduce the amount of capital that is owed on the plan. If you want to make a payment above the equity release provider’s terms and conditions then early repayment charges may be applicable and it is wise to clarify with your equity release adviser what limits you have before a charge would be applicable.
Your lender will accept payments through a variety of ways which will include direct debit, bank transfer, cheque and telephone card payment. Each provider may vary, so it is always best to check.
Always consult with your equity release advisor before making any decisions.
When you pay off your Lifetime mortgage in full, what happens?
Equity Release plans are generally intended to last until the death of the last borrower, or if the last borrower enters long-term residential care. With this said you are still able to make payments against the Equity Release plan or fully repay it at any time. When making repayments, you may incur an Early Payment Charge.
If you have a lifetime mortgage, you can repay the loan in full at any time without incurring any Early Repayment Charges (ERC). This is because lifetime mortgages are typically interest-only loans, so repaying the loan amount does not reduce the overall debt. You can make partial repayments as and when you want, up to the maximum allowed by your lender.
What are Early Repayment Charges (ERCs)?
Early Repayment Charges (ERCs) are fees charged by some lenders if you repay your equity release plan early. The amount of the charge will depend on how long ago you took out the plan and how much money is outstanding on the loan. ERCs can be high, so it’s important to check whether they apply to your plan before you take it out.
What are Lifetime Mortgages with fixed Early Repayment Charges (ERCs)?
As the name suggests, these plans have a fixed rate of interest for the life of the plan. This means that your monthly repayments will stay the same, even if interest rates rise. The main advantage of this type of plan is that you know how much you’ll need to repay if you do want to sell your property or pay off the loan early.
The biggest advantage of fixed-rate ERCs is that you will know the exact amount you will be charged before signing any legal documents for the policy. This means no unsurprising catches if you decide to make payments on the lifetime mortgage.
What are variable rate ERCs?
Variable rate ERCs are based on the lender’s Standard Variable Rate (SVR), which can go up or down. This means that your monthly repayments could increase or decrease if interest rates change.
The main advantage of this type of plan is that you have the flexibility to make overpayments without incurring any charges. This can be helpful if you want to reduce the amount of interest you’re paying, or if you want to pay off the loan early.
As with all financial products, it is important to seek professional advice before taking out an equity release plan. Equity release is a lifetime commitment and should not be entered into lightly. You should always speak to an adviser to make sure that an equity release plan is the right option for you.
Early Repayment Charges on initial borrowing or the balance?
It is essential to understand that some lenders calculate ERCs based on the original borrowing, while others take into account the current outstanding balance. Depending on when you make a payment, this could have a significant influence on the fee charged.
For example, if you have a loan of £100,000 and make a payment of £20,000 after two years, the ERC with some providers would be calculated as a percentage of the original borrowing (£100,000). This would give you an ERC bill of, say, £4000. Whereas with other lenders, it would be based on the current balance outstanding (£80,000), which would give you an ERC of £2000.
It is important to check with your lender how they calculate ERCs before making any overpayments.
How much is an Early repayment Charge (ERC)?
Early Repayment Charges (ERCs) are typically a percentage of the loan amount, but the exact amount will depend on your lender and when you took out the plan. ERCs can be high, so it’s important to check whether they apply to your plan before you take it out.
Because different lenders provide various alternatives, each with its own set of fees, it’s critical that you’re aware of any costs linked with your plan.
Are there any Circumstances in which Early Repayment Charges (ERCs) do not apply?
There are some circumstances in which Early Repayment Charges (ERCs) do not apply, such as if you die or go into long-term care. This is because the loan will be repaid from the sale of your property.
Most equity release providers will allow you to make overpayments on your plan, but there may be limits in place. For example, some providers limit overpayments to 20% of the original loan amount each year. If you exceed this limit, you may be charged a penalty fee.
However, there are several distinctions. Some lenders let you make as many payments as you want from the start. Other lenders, on the other hand, will set a maximum number of payments and require that the plan has run for a minimum length of time.
Making voluntary repayments can help to reduce the amount of interest you pay and the loan balance, as well as shorten the term of the loan.
It’s important to check with your provider whether there are any restrictions on overpayments before you take out a plan.
If you’re considering taking out an equity release plan, make sure you understand all the fees involved.
Can I port my plan when moving property?
If you’re thinking of moving house, you may be able to port your equity release plan to your new property. This means that you can take the loan with you and don’t have to repay it until you die or go into long-term care.
However, there are some conditions that need to be met in order for this to happen. For example, your new property must be of a similar value to your current one and it must be your main residence. This criterion varies from provider to provider and your equity release provider can help you to find out if porting is an option with your plan.
The Equity Release Council is made up of a variety of lenders. If your lender falls within this they will allow you to port your plan as long as they approve of the new property and it fits their lending criteria.
It may be in the terms that your lender may require you to repay part of your plan if the new property value is significantly lower in value than your initial property. This could result in you being asked to pay a higher proportion of the outstanding amount due to the fact that the lender’s security has decreased. This probably won’t be an issue since, hopefully, you will have enough money to meet the monthly payments from the sale proceeds of your current home.
Different lenders have varying underwriting standards, which means that the same home may not meet all of your current lender’s requirements. In this case, you would need to port your plan to a new lender.
It’s important to remember that if you do want to port your equity release plan, you will need to get the new lender’s permission first. They will then assess whether they’re willing to accept your current plan and how much they’re willing to lend against the value
What is Downsizing protection?
Downsizing protection is a feature of some equity release plans that allows you to move to a smaller property without having to repay the loan early.
This can be useful if you need to downsize for reasons such as ill health or if your family circumstances change.
For example, if you have children who have left home, you may want to downsize to a smaller property that’s easier to manage.
There are several different terms for this feature. Some lenders will only allow you to utilize downsizing protection if the new property isn’t approved of by them. Other lenders allow you to use it at any time, regardless of whether they are willing to modify your current plan.
Another distinction among lenders is that some of them allow you to use the functionality from the start. Some lenders, on the other hand, will not enable it until a certain period of time has passed but an equity release adviser will be able to explain this depending on what plan is reccomended.
If you have a lifetime mortgage with downsizing protection, you can move to a new property without having to repay the loan early, as long as the new property is worth at least the same amount as your current one.
Is it necessary to make payments towards my Equity Release plan?
No, it is not necessary to make payments towards your equity release plan. The interest is added to the loan and only paid off when the property is sold. However, you may want to make partial repayments to reduce the amount of interest that is added to the loan.
They are affording you the flexibility to pay none, some or all of the interest accrued on the plan. You could also make payments above the interest charged, allowing you to reduce the capital owed and can save you money when the plan ends.
What happens if I can’t keep up with the repayments?
If you’re struggling to make the repayments on your equity release plan, you should speak to your provider as soon as possible. They may be able to offer you a payment holiday or extend the term of the loan.
If you miss a payment, this will usually result in a penalty fee. However, if you’re in financial difficulty, your provider may waive this fee
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If you’re considering equity release, please get in touch with one of our advisors. We would be more than happy to help you understand your options and find a plan that’s right for you.