How is equity release paid back?
Equity release is typically paid back when the last homeowner passes away. But can you pay off equity release early?
Equity release plans allow homeowners aged 55 or over to access the equity in their home.
These plans don’t usually require any monthly payments and the debt is repaid when you pass away or move into long-term care.
Many people wonder how equity release is paid back and whether they can voluntarily make repayments. Read on as we explain how equity release is paid back.
Please Note: The content on this page is designed to be a helpful starting point for understanding equity release. It explores the concept, different plan types, and the general process involved. However, equity release is a complex financial decision with significant implications for your long-term financial security. To determine if equity release is the right option for you, it’s essential to consult with a qualified financial adviser who specialises in equity release products.
Types of equity release plan
Equity release is a type of mortgage for pensioners, that allows you to access the equity that you have built up in your property and release some of it for you to enjoy.
This could be used for home improvements, family gifts or maybe a boost for your retirement income.
Importantly, you do not have to move to do this.
There are two main types of equity release:
Home reversion plan
A home reversion plan allows you to sell part or all of your home to a reversion plan company in exchange for a tax-free cash lump sum, with no monthly repayments to make.
You have the absolute right to stay in your home rent-free for as long as you choose which is why you don’t typically receive full market value for the share of the home you sell.
When you die the home reversion provider takes its percentage share of the sale proceeds from your property.
Lifetime mortgage
If you’re over 55 you can release some of the equity in your property by taking out a lifetime mortgage. Your home still belongs to you, there’s no need to move home and no requirements for any monthly payments.
You are charged interest, and this is added to your mortgage balance, increasing the amount owed each year.
The loan, plus the interest, is fully repaid from the sale of your home either when you die or move into long-term care.
Lifetime mortgages explained
Lifetime mortgages are the most popular type of equity release and are the focus of this guide.
With a lifetime mortgage you borrow money which is secured against the value of your home. The money released is tax-free and you can spend this how you wish.
Many borrowers choose to have a drawdown lifetime mortgage which gives you a pre-agreed credit limit. This allows you to take regular withdrawals, reducing the interest charges.
The total amount you could release depends on your age, health and the value of your home.
If you already have a mortgage then this must be fully repaid from the proceeds of the lifetime mortgage. The excess money after repayment will be yours.
You won’t face the typical monthly repayments associated with a traditional mortgage. Instead, the interest on your loan accumulates over time, a concept known as “rolled-up” interest.
This interest gets added to the total amount owed, steadily increasing the loan balance as the years pass.
When is equity release paid back?
With an equity release plan you have the right to stay in your property for the rest of your life.
The debt is only repayable when you die, or move permanently into long term care. If you have a joint equity release mortgage this applies when the surviving partner passes away.
You can read more about how this works: How does equity release work when you die?
How is it paid back?
While many people think that the lender will sell the property, they won’t want to do this.
This responsibility falls to your executor/s.
The majority of lifetime mortgages are repaid from the sale of your home. This obviously can take a while, lenders generally allow 12 months for this to happen, but still charge mortgage interest in the meantime.
If there are sufficient cash or other liquid assets in your estate then these could also be used to repay the loan.
The lender won’t mind.
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Can you pay back equity release?
There’s no obligation for you to make payments or pay back the equity release money while you are living in your home.
The plan is setup so that the lender is not expecting any repayments from you.
Despite this, many borrowers want the peace of mind that this is an option, if needed.
So what happens if you want to pay back early?
The specifics will depend on the lender and their own rules.
Broadly speaking, you will always be able to fully or partly repay your lifetime mortgage. Or maybe you just want to cover the interest charges.
The real question is whether the lender will penalise you for making the payments early, and how much extra this will cost you?
Reasons for early repayment
There’s quite a few reasons why someone would choose to repay their equity release plan before it’s due.
If you now have cash from a property sale or inheritance then you may want to put this towards your equity release plan. As long as the cash is not needed it will prevent your estate being eroded by mortgage interest charges.
Or you may have now decided to downsize and fully repay the equity release debt.
There’s obviously all sorts of possible scenarios. Repaying early can mean that you are charged penalty fees, so it’s a good idea to get some professional advice on your options before you commit.
Early repayment charges
Is there a penalty for making early repayments to a Lifetime Mortgage?
Charges will vary between providers and products but with most new plans you can typically make repayments of up to 10% per year, penalty free.
The Equity Release Council (ERC) have created the following standard which all approved plans must follow
“All customers taking out new plans which meet the Equity Release Council standards must have the right to make penalty free payments, subject to lending criteria”.
If you decide to repay your plan early, or wish to pay more than the annual limit, then early repayment charges will normally be levied by the lender. These charges will have been explained to you prior to applying for your lifetime mortgage and the exact details will be in your mortgage offer/contract.
When charges may not apply
There are no extra charges if the plan is repaid following the death or move to long-term care of the last borrower.
Charges won’t apply to partial repayments as long as you stay within the annual limits. This is typically 10% per year.
If you move home then your lifetime mortgage could be transferred to your new property without charges. The property must meet the approval of the lender.
The significant life event exemption applies to joint plans. It gives you the option to repay the lifetime mortgage within three years of a partner passing away or moving into long-term care.
Equity release advice
If you’re looking to make changes to an equity release plan then it’s a good idea to speak to an expert first.
Each plans has it’s own rules for what you can and cannot do.
Let Respect Mortgages help you take the next step.
We can match you to an award winning equity release specialist, with over 25 years experience helping people just like you. Importantly they’re also members of the Equity Release Council.
Please call us on 0330 030 5050 for more details.
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