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Can I Repay an Equity Release Plan in Future?

by | Oct 14, 2022 | Equity Release

There are several reasons why someone taking out an equity release plan may want to repay the plan early. In this article I aim to explore some of the main reasons as well as some important things you need to be aware of. 

The first thing to understand is that there are two types of equity release plan available in the market, Home Reversion Plans (HRPs) and Lifetime Mortgages (LTMs), they both operate differently when it comes to paying back the plan early. 

Home Reversion

This involves selling some of or all your property to a Reversion Provider, however, you do not receive the full market value of the percentage sold, instead, the Provider will pay you a percentage of the property value based on your age, the older you are, the higher the percentage paid. The difference between the market value and the amount paid to you is the provider’s ‘profit’. You retain the right to remain in the property for life and do not have to pay rent (although some schemes do allow this for a financial consideration in your favour). 

Repaying this type of plan essentially means buying back the part of the property sold, however, you would have to pay the full market value of the percentage you buy back, so the Provider takes their profit ‘upfront’, and this means that exiting these types of arrangements can be very expensive. There are still some reasons that an advisor may recommend a reversion but if you plan to repay it early or move home at some point, it may not be the best option. This is one of the reasons that there are very few Home Reversion Plans recommended now. 

Lifetime Mortgage

A Lifetime Mortgage is a loan and the amount you release is secured on your home in the same way that a standard mortgage would be, and the Lender will charge interest while the plan is in place. You can repay the loan at any time, however, just like a standard mortgage may have an early repayment charge if you repay it under certain circumstances or within a time frame, a LTM will be subject to the Lender’s terms and conditions regarding their early repayment charge criteria for your specific plan. 

For more information on Lifetime Mortgagers and Home Reversion Plans please visit the ‘How It Works’ page on our site. 

Early Repayment Charges on Lifetime Mortgages

There are two types of early repayment charges for a Lifetime Mortgage, these are fixed and variable penalties. 

Fixed 

Fixed early repayment charges are in place from the outset. This means there is an agreed penalty in place for a specified time. This mechanism is similar to a standard mortgage that has a fixed interest rate for a specific period (e.g., a 5-year fixed often has penalties for 5 years), however, interest rates on Lifetime Mortgages are usually fixed for life so penalties are often for longer periods. The length of time a charge applies on LTMs vary from plan to plan but typically range from 5 years at the low end up to 15 years at the high end. 

Although this will mean there will be a penalty during this fixed period it also means that once this period has ended you are free to repay the plan without incurring an early repayment charge, which means you can plan for future events more accurately.

The amount of the charge will usually be a percentage of the sum repaid, or a percentage of the original loan amount. Often the charge decreases over time, the highest penalty on a plan would usually be in year 1 and as time progresses the charge becomes less expensive. 

An example of a typical decreasing charge could look like this:

Year 1 10% Year 6 5%
Year 2 9% Year 7 4%
Year 3 8% Year 8 3%
Year 4 7% Year 9 2%
Year 5 6% Year 10 1%

 

After year 10 the charge would expire.

Variable

Variable early repayment charges as the name would suggest will vary over time. These penalties are usually liked to Government Issued Long Term Stocks or GILTS. You do not need to be an expert on GILTS but essentially, they are bonds issued by the UK Government. 

Upon issuing a formal mortgage offer these plans are linked to the interest rate available for a specific GILT on that day. The future changes in GILTS (interest rates can increase or decrease) will determine whether there would be an early repayment charge or not to repay. 

Typically, if the GILT interest rate is higher on the day you repay your Lifetime Mortgage, than it was when your offer was made, there would not be a penalty, (some Lenders stipulate that it must increase by a minimum amount set by them). 

If the GILTS have fallen, then you are likely to be charged a penalty which will be a percentage of the loan amount (or amount repaid), the further it has fallen the higher the penalty will usually be. Most of these plans are capped at 25% but some are capped lower than this. The benefit of these plans is there may be no penalty at all, however it is not predictable as it relies on the stability (or volatility) of the GILT markets. 

Exceptions to the rule

Some plans have a feature called Downsizing Protection which means that if you wish to move within a certain timescale (typically after 5 years), then you can do so and repay the plan without incurring a charge. Some downsizing features may require you to take the plan with you to the new property (Porting), however, if your new home does not meet the lenders criteria, you can usually repay it without having to pay a penalty or charge. 

Some plans also offer a 3-year early repayment charge exemption for joint applications, in the instance when one plan holder passes away or moves into long-term care there would be a suspension of early repayment charges for 3 years to allow some flexibility for the survivor. This means if there were a life insurance policy in place that allowed the beneficiary to repay the plan, or if the survivor wanted to sell up and downsize, or move in with family, they could do so without incurring a penalty.   

Which is the best option for me?

This very much depends on your circumstances. If you plan on repaying in a specific number of years, it may be worth exploring a fixed penalty plan, but if your intention to repay is only linked to a life event like your spouse passing away, then it may be more appropriate to focus on the protections rather than the penalty structure itself. There are other factors to consider, such as your age and how likely you are to repay early, discussing your needs with an advisor will help you to clarify your options.

Get the right advice

When discussing circumstances, there are two simple questions I always ask if someone intends to release equity but is planning repay the funds in future, that is ‘How’ and ‘When’ do you plan to repay the money back. This allows me to determine what type of penalty structure may be the best option for my client. 

‘How’ are you likely to repay?

Understanding how someone intends to repay in the future is extremely important during the advice process as it can have a direct impact on which plans are more suitable to someone’s individual circumstances. I have made a list of some of the common scenarios below, but if these do not fit your future plans, speak to an advisor who will be able to help. 

Downsizing

This is probably the most common reason someone would want to consider repaying an equity release plan in future. Since there are a few factors to take into consideration here, I am going to break this down into 2 parts. 

  1. Some people already have in mind that they may downsize or move in future and if that is the case then continue reading this article but you may also find this article useful too – What happens if I want to move home in the future?
  2. When considering a joint application, both parties may be completely happy in their home with no intention to move in future, but this could change if one person was to pass away or move into long term care. 

Inheritance 

Some people I speak to can be expecting to receive a sum of money or a share in a property in future and may intend to use some of this money to repay any equity release in place. 

Investments & Pensions

Some people may have investments that haven’t yet matured, other properties they are not ready to sell yet or even pensions that may be available in the future. 

‘When’ are you likely to repay?

Understanding when the funds are going to be available to repay can again have an impact on which plan is most suitable. If you know you have an investment that will mature in 5 years’ time, a property you intend to sell in 10 years or you may plan to move in a specific number of years. So why is the ‘When’ so important? Firstly, knowing when you intend to repay the plan will help your advisor to navigate the equity release market to find a plan that best fits your needs, but it is also important that you understand that equity release is not designed for short term lending. So, if you want some funds but intend to repay in 6 months or a year then you may want to consider waiting if possible or even consider more appropriate short term financing options, that doesn’t mean you cannot do equity release, but we would want to ensure that you had considered other alternatives. 

Summary

In conclusion, if you are considering equity release then I would also urge you to consider what your long-term plans may be and to discuss them with your advisor. I would also ask you to consider how important or likely your plans to repay early are, achieving lower penalties would be nice, but if it is extremely unlikely you are going to repay early then other factors may be more important or cost effective.

One last thing to bear in mind is that equity release, is not a short-term solution and it is important to explore all alternative options if you do not need the funds to be in place ‘for life’. Again, a good advisor should help you explore this.

 

By Craig Spiers – Later Life Mortgage Advisor at Lifetime Equity Release

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