Although equity release products are generally intended to last the lifetime of the borrower, they can be paid back. Borrowers who wish to repay a home reversion equity release will generally have to pay the lender a penalty, called an Early Repayment Charge (ERC), on top of the sum borrowed.
ERCs are usually fixed rate – calculated either as a percentage of the amount borrowed, or of the outstanding balance. They generally operate on a sliding scale, with a higher ERC in the first 3-5 years, followed by a gradual tapering. In many cases the ERC will fall to zero after a sufficient period, typically 8-10 years. Borrowers should ensure they understand the specific terms and conditions regarding early repayment before they sign the equity release agreement.
Reasons to repay equity release
It is important to note, there is no obligation to make early repayment, even when you wish to move home. Most recent equity release products are portable – with some restrictions. In particular, equity release products now come with downsizing protection – meaning that if you are moving to a smaller, less valuable house, you can repay your loan without ERCs.
However, it is possible that if interest rates are much lower than when a borrower initially received their equity release loan, it could be worth repaying one loan to take out another at a preferable interest rate. However, for some equity release products, the ERCs themselves are variable rate – linked to the interest rates on gilts (UK government bonds). Many older equity release loans in particular use this approach, and hence falls in gilt rates could result in higher ERCs, obviating the benefits. Note that this approach may also incur additional fees.
Pay as you go? Making partial repayments to equity release
A common request for lifetime mortgage borrowers is for ad hoc partial repayments to manage the level of debt, or at times when income exceeds expenditure. This can be accommodated by lenders using a voluntary payment option, typically allowing borrowers to repay either a proportion (typically about 10%) of the original loan or a slice of the interest accrued, each year. ERCs would not apply to these payments. On older loans, the desire to do this had to be expressed to the lender and written into the loan agreement. Since March 2022 however, all new loans made by members of the Equity Release Council, an industry body, must allow partial repayments without penalty as standard. It is worth noting that some lenders may allow borrowers to repay much more than 10%, but may charge higher rates on the loan itself to compensate for the risk of repayment.
Can home reversion plans be repaid?
The situation is slightly different for home reversion equity release, as the lump sum received is funded by equity, not debt. Hence there are no repayment charges, as the equity release provider holds a share in your house. Additionally, while the provider will purchase this share at a discount, they will typically only sell it at market price, meaning it can be much more expensive to ‘repay’ under a home reversion scheme.
Before repaying your equity release mortgage, speak to a qualified equity release adviser, who will be able to help you decide whether this is the right decision for you and your circumstances.