Can you pay back equity release early?

We explore equity release early repayment charges and options

When unlocking some of the tax-free cash from the value of your home, it’s important to consider your current and future needs. Equity release is usually a lifelong commitment, so you’ll need to plan ahead if paying off equity release early could be on the cards.

To help you explore the implications for ending a plan early, equity release early repayment charges (ERCs), and if you can arrange equity release with no early repayment charges, we’ve put together the following information:

• How does equity release work?
• How can you pay back equity release?
• Can you pay off equity release early?
• Why would I want to pay back equity release early?
• Why are there early repayment charges for equity release plans?
• How are equity release early repayment charges calculated?
• How can I pay back equity release early?
• Are there equity release plans with no early repayment charges?
• What providers say about equity release early repayment charges

How does equity release work?

Equity release is a financial product which enables homeowners aged 55+ to access some of the tax-free money from your home for whatever purpose you wish.

Popular reasons for equity release include paying off the mortgage, making home and garden improvements, holidays, helping loved ones financially and buying a new car.

Whilst there are many flexible options and features to choose from, there are two main types of equity release plan. These are lifetime mortgages and home reversion plans. 

Once you know how much you can unlock, you are given the option to take all of your available funds as a single lump sum, or you can choose a drawdown plan. The latter allows you to access your money in smaller amounts over time. This can save a significant amount of interest in the long-term as it only accrues on the money you actively release. 

Want to know how much you could unlock from your home? Check your eligibility and get your free quote now!

How can you pay equity release back?

Unlike other forms of borrowing, you won’t have to make any repayments for the life of your equity release plan. This is because the loan plus interest rolls up each month. 

Your estate will typically repay your plan, including the interest, from the sale of your home when you pass away or move into long-term care. Your executor/s will be given a set period of time, usually 12 months, to sell your home and repay your plan.

If you wish, you can select an interest-only equity release plan to make voluntary payments each month and prevent interest accruing on your plan. This means your estate will only have to repay the capital of your loan when your home is sold.

Can you pay off equity release early?

By choosing an equity release plan that the Equity Release Council approves, you have peace of mind that you will be able to make voluntary partial payments, or a full early repayment, whenever you wish. 

Every year you will receive an annual statement from your provider which will tell you everything you need to know about paying back equity release. The statement will detail your overall loan amount, plus any early repayment charges (ERCs) you might incur for ending the plan early. 

Depending on your chosen provider’s terms and the amount that you wish to pay off, you may be able to make your repayment/s without incurring any penalties. 

However, there are circumstances when you could incur early repayment charges. As ERCs can be considerable, it is essential that you seek guidance from an equity release adviser before committing to a plan.

Did you know? At Equity Release Wise, our selected advisers will only recommend plans that the Equity Release Council approves for your safety and peace of mind.

Why would I want to pay back equity release early?

If you come into some money or you plan to downsize your home to a less expensive property, then paying back equity release might be an option for you. This could mean you are able to leave a larger inheritance for your loved ones in the future. 

Of course, you do risk incurring potentially very large ERCs. You will need to weigh this up against the interest that you will save by ending your plan early. 

If you are considering equity release but think you might want to repay your plan early then make sure you communicate this to your equity release adviser. They will be able to search for a plan that best suits your current and future financial goals, including for example, equity release with repayment options.

Why are there early repayment charges for equity release plans?

Lifetime mortgages are typically a lifetime commitment. Equity release providers set their rates and fees based on statistics which determine when they can expect to see loans repaid. They have to recover the costs of reinvesting their money or any losses they incur due to changes in long-term interest rates.

How are equity release early repayment charges calculated?

Different plans offer different equity release early repayment charges and terms, but they typically fit into two main categories: fixed and variable early repayment charges.

Fixed early repayment charges

Also known as ‘defined’, these often taper over time and are clearly laid out when you arrange your plan. They can make planning ahead easier for customers.

When you arrange an equity release plan with fixed ERC’s, the penalties are laid out for you in your Key Facts Illustration and lifetime mortgage offer. This means you can work them out before agreeing to your plan.

Example of a 15-year fixed early repayment charge period (for illustrative purposes only):

When you first arrange your loan, you are in Year 1. If you were to pay off your loan in full in Year 5 of this particular example, then you would owe 6% of your overall loan in charges. This is in addition to the balance of the loan itself. 

So, with a 15-year ERC period, after having your loan for a full 15 years, paying back equity release can be done without penalty. Some fixed ERC periods are lower and your adviser can specifically search for these if you intend to repay your plan early.

Variable ERCs

Variable ERCs are based on the value of government bonds called ‘gilts’ and offer penalties between a minimum and maximum amount.

When you choose a plan with variable ERC’s, you will not know what the penalty for paying your loan off early will be until you come to do it. However, the minimum and maximum amounts you could incur will be available in your Key Facts Illustration document. 

The good news is that no ERCs may be due if gilt yields rise between you taking out your equity release plan and when you choose to repay it. However, if gilts have fallen, your provider will issue a penalty in line with the fall in value. This could mean paying back equity release ends up being very expensive.

Variable ERCs are typically capped at 25%, though your individual circumstances may exempt you from any penalty, as we cover further on.

How can I pay back equity release early? 

If you wish to settle your loan early then there are two main forms of equity release repayment options: make voluntary partial repayments, or pay your loan back in full.

Make voluntary partial repayments

All plans that the Equity Release Council recommend allow you to make penalty-free partial repayments towards some or all of the monthly interest. 

However, some plans go further and allow you to repay a percentage of the total amount borrowed each year. As is the case with LV=, for example, this amount is usually capped at 10% of the initial loan amount each year, but some plans are capped at 15% or even higher.  If you kept up with the payments, you could clear your loan in under 10 years, penalty free. 

Pay back in full

You can repay your overall loan in full at any time. Depending on your plan and provider, you may incur early repayment fees for ending your plan early. There are however exemptions to ERCs, which we will cover further on. 

To end your plan early, contact your provider using the details provided on your welcome pack. You will need to ask for a redemption statement. This will give you all the information you need to settle your loan and exactly what fees you will incur, if any.

Can I get equity release with no early repayment charges?

Most equity release plans will have ERCs built into them, but that isn’t to say you will always incur any yourself. 

Exemptions from ERCs typically include the following scenarios:

• Repayment takes place after your death or the death of the remaining borrower.
• You or the remaining borrower move into long-term care.
• The fixed early repayment charge term has expired.
• You sell the property and transfer the mortgage to another suitable property.

There are also plans available with special features that allow you to repay your loan early without incurring any penalties. These include:

Compassionate Early Repayment Charges: Also known as Significant Life Event Exemption, this allows you to repay your loan without penalty within three years of your partner passing away or moving into long-term care.

Downsizing Protection: This gives you the freedom to downsize your home and repay your loan in full without incurring any penalties, once you have had your plan for a minimum of five years. 

Of course, you don’t have to repay your loan just because you are downsizing or moving house. All plans that have the Equity Release Council stamp of approval give you the right to ‘port’ your plan to a new home without incurring any equity release early repayment charges, subject to it meeting your lender’s requirements.

What providers say about equity release early repayment charges

How much your equity release early repayment charges will be depends on your plan, provider and your own circumstances at the time of repayment.

Below, we take a look at what some of the big name providers offer in terms of their ERCs. Don’t worry if some of their terminology is confusing; our selected advisers can explain everything in a jargon-free language and answer any questions you have about charges. 

Aviva

This provider offers fixed percentage ERCs. Their Variable Individual Gilt ERCs have not been available to new customers since January 2022. Their fixed percentage ERC period is 15 years after taking out the lifetime mortgage, unless you borrow an additional amount after your initial loan.

Legal & General

L&G’s ERCs are capped at 25% of the amount(s) drawn and linked to movement in UK FTSE Actuaries 15 Year Yield (the Index). As it levies government bond-based early-repayment charges, you could incur high fees if you choose to pay your loan back early. However, you will not be charged any ERCs if the Index at the time is higher than or equal to the Benchmark Rate shown in your Offer of Loan.

LV=

LV has fixed ERCs across all its products, with none to pay after 10 years. Notably, for Lifetime Mortgage Drawdown+ plans, the early repayment charge is based on the completion date of the original loan, rather than the date of further withdrawals made.

Canada Life

The early repayment charge is 5% in the first five years of arranging your plan. This reduces to 3% during years 6 to 8. Their ERC period is 8 years after taking out the lifetime mortgage, unless you borrow an additional amount after your initial loan.

More2Life

This provider offers fixed early-repayment charges with two time scales available. Their Capital Choice Plan, for example, ensures customers pay no more than 5% in ERCs if the loan is repaid in the first five years. In the second five years of the plan, the ERCs fall to 3 per cent, and after 10 years there is no penalty at all. 

Alternatively, their 15-year time scale begins at an ERC of 10% in Year 1, 9% in Year 2 and so on. There is just a 1% fee applicable for Years 10 – 15 with no penalty thereafter for homeowners paying back equity release.

Talk to Equity Release Wise 

Having taken the time to research ‘can you pay back equity release’, ‘equity release early repayment charges’ and ‘can I pay off equity release early?’, your next step is speaking to a specialist. They can answer your questions, check your eligibility and explain which plan might suit you best. They can also inform you if you could possibly access equity release with no early repayment charges at all.

Don’t miss out on your opportunity to receive free equity release guidance and advice from a specialist. At Equity Release Wise, all the information and quotations our selected advisers give you is entirely free and without obligation. 

In fact, you will only be charged a fee for advice if you choose to go ahead with a plan, though this can be paid from the money you unlock. So why wait any longer? You have nothing to lose by calling our friendly team today!

Want to know more? Get a personalised quotation for equity release with repayment options by calling 0808 178 3055. Or request a free callback here for a time that is convenient for you.

Arranging an equity release plan on your home is a large and typically lifelong financial commitment, so make sure you consider all the pros and cons of equity release. We also encourage you to involve your family members, as your decision is likely to affect them. By its very nature, a plan will reduce the value of your estate and the amount of inheritance you leave to your loved ones.