There are a number of reasons why you may want, or indeed be forced to repay your equity release loan before you die.
Are There Costs for Repayment an Equity Release Loan Early?
You can repay an equity release loan before you die, but you’ll be subject to an early repayment charge of around 15%. This charge will typically get lower the longer you’ve been making repayments.
Read on to find out more about these reasons and how they might impact you.
- – Can equity release be paid back?
- – Can you use equity release to pay off mortgage?
- – Can equity release be transferred to another property?
- – Can you be refused equity release?
We update all our guides regularly. If you are researching Equity Release and we haven’t got an exact guide that helps you, keep coming back as we update daily.
When Equity Release Must Be Paid Before Death
Technically, you have to repay your equity release loan when you no longer live in your property. Usually this means when you die, but if you need full-time care then you will also have to repay the loan from your estate. The estate will be liquidised, normally to help fund your care but primarily to make sure your equity release loan is repaid.
If you live with your partner, you need to make sure that you have a joint equity release plan. If it’s only in their name, and your partner dies, then again you would need to repay it and potentially sell the home you’re living in before you’ve passed away. If you’re already living with your partner when you take out the loan, your financial adviser will make sure to take this into account.
But it’s when you meet your partner later in life and they already have an equity release loan that you need to be careful and plan for what happens if they do die or go into care before you. Speak to a financial adviser if you are living in a partner’s home without your name on the equity release plan and they can help you find a solution to protect you.
According to the Equity Release Council 37,000+ people used Equity Release schemes in 2018, releasing over £3.06bn from their properties.
Equity Release: Early Repayment Charges Explained
When you take out your equity release loan, you’ll have any early repayment charges explained to you. These are the charges that will be added to the cost of your loan if you decide to repay it early, or you’re forced to due to wanting to downsize your home.
The reason early repayment charges exist is to protect the expected earnings of the lender. If they’ve given you an equity release loan, they’re expecting to earn a significant sum of interest over the duration of the loan and indeed may be literally banking on it.
If you pay it off early, that interest that would’ve otherwise continued to accrue would no longer be due to them. So an early repayment charge helps to partially mitigate for those lost earnings.
Early repayment charges vary lender-to-lender. You’ll need to make sure you’re fully aware of them when you sign your agreement – but the obligation for this also lies with the lender and the advice you’re given. Early repayment charges should be made very clear to you up front.
If they aren’t, then you may have an argument to make a claim with the Financial Ombudsman for a mis-sold policy, but the lender will be able to demonstrate if they did make it clear upfront, so don’t make a frivolous claim in hope.
A lot of lenders will offer faded early repayment charges. Again these can differ wildly by lender but a good standard is an early repayment rate of 5% of the original loan amount, which drops to 3% after the first five years.
So the longer you leave your loan active, the less you’ll need to repay as an early repayment charge. However you’ll also have accrued more interest, so it won’t actually be cheaper.
Equity Release Example £50,000 Loan
|Original Loan Amount||Interest Rate||Duration of Loan||Interest Accrued||Early Repayment Rate||Early Repayment Cost||Total Due|
As you can see, the sooner you decide to repay the equity release loan the better, even if the early repayment charge is higher. The compounded interest will add up at a faster rate over longer periods of time so if you can mitigate that, your repayment will cost less.
The alternative early repayment charge that’s commonly used is a gilt-linked variable charge. These can go up and down depending on the current gilt rate – long term savings rates for government bonds.
There’s no way of accurately predicting what your early release payment is when it is linked to gilts as they can change by the day. But put simply, if the gilt rate increases then there would likely be a minimal charge to repay early, as the money you repay is worth more to the lender than it would’ve otherwise been. But if it drops, you could end up owing many thousands.
And since it varies, you may have one cancellation fee one week but then, after mulling it over for a few days, it could completely change and throw your plans out.
There is one protection in place for gilt-linked repayment charges, and that is that the charge can never be more than 25% of the total value of the loan. But if you do wish to cancel and you’re quoted a figure in the many thousands, it’s best to wait to see if the financial situation in the country changes which could impact the gilt rates.
Equity Release: Downsizing Protection Explained
One of the more common reasons for people to repay their equity release loan early is when they have decided to move home and are downsizing. Downsizing is common in retirement as it can help to free up extra cash and often, people find they simply don’t need as much space, or they may wish to move into single-storey accommodation if they struggle with stairs.
You can’t transfer an equity release loan to a new property if the value of the new home’s equity doesn’t cover the loan, so you’d need to repay it. If you think you might downsize then you should consider an equity release loan with downsizing protection.
This is an added feature to around 45% of equity release schemes that lets you repay your loan without an early repayment charge, providing it is for the purpose of downsizing your home. This could save you thousands in extra charges. You’d then just need to repay the loan, which you could do from the profit made on selling your home and buying one of lower value.
As with any equity release loan, your financial advice at the start of the process should take you through all of the options available, and the various circumstances that impact your situation, to give you a choice of plans suited to you.
Make sure you’re upfront if you think you may downsize in future so that your adviser can take this into account and help you find the best financial solution to protect you if you did decide to repay your loan sooner.
In the majority of cases, you’re able to repay an equity release loan before you die if you have the funds available, although you will be liable to repay it in full including interest and an early repayment charge, unless you have downsizing protection and are moving home.
Equity release isn’t for everyone, but it certainly can have its advantages, so read our further guides if you’d like to know more about the pros, cons, interest rates and more.
Quick Equity Release FAQs
Home reversion plans are, in essence, a means of selling a share in your property to an investor, in exchange for payment. There are no repayments, with the investor receiving their share of proceeds when the property is eventually sold.
The Equity Release Council is the industry body which represents equity release providers, qualified financial advisers, solicitors and intermediaries. Equity release is a growing sector, especially for older homeowners who may have limited access to finance.
You need to be at least 55 years old to apply for equity release in the UK. If you are planning to make a joint application, this applies to both of you.
Equity release drawdown works by giving you the value of your loan as a pot that you can make withdrawals from. You’ll only pay interest on the money you decide to withdraw.
How Can Money Savings Advice Help You With Releasing Equity?
Here at Money Savings Advice, we have partnered with some of the UK’s leading Equity Release brokers. They have already helped thousands of people get the best Equity Release deal and they can do the same for you.
Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.
If you would like to speak to one of these brokers who can provide you with a ‘whole market quote’ then click on the below and answer the very simple questions.