Equity release repayment examples
Despite equity release usually being a lifetime commitment, there are in fact a number of different scenarios where you or your estate might repay your loan plus interest.
Here are some equity release repayment examples to help you understand why or how repayment can take place during or after your lifetime.
When a homeowner passes away
Perhaps the most common of equity release repayment examples is death of the homeowner/s. With both a lifetime mortgage and a home reversion plan, once the last homeowner passes away then the plan comes to an end. At this point your home is typically put up for sale.
Example: Mr Chambers lives alone after the passing of his wife five years ago. When he passes away, his home is sold by his sons. They settle his equity release loan plus interest, for which there is no early repayment charge to pay. The remaining money is then divided according to his will.
Read more about this in our article: “What happens to equity release when you die?”
When you move into long-term care
Another reason why your plan would naturally end is when the last remaining homeowner moves into long-term care. If this happens then your home is put up for sale in order for the loan plus interest to be repaid.
Example: Mrs Holden lives on her own as her husband is in a nursing home. Mrs Holden’s dementia gradually worsens and the family make the decision to find her a suitable care home. With both homeowners now living in long-term care, the home is put up for sale and the equity release plan is repaid.
Not selling the family home when your plan ends
Your home doesn’t have to be sold in order for your equity release plan to be repaid. If you pass away or move into long-term care then your family may use a life insurance payout or another cash facility to repay your plan. Some families choose to do this to keep the house in the family, or to let it out as an investment property.
Example: Ian Smith passes away with a large life insurance policy in place. His home has been in the family for generations, so his daughter uses the insurance money to pay off the equity release loan and interest in order to keep his home.
Paying your plan off early
Sometimes homeowners choose to repay their equity release plan early. You might do this yourself if you come into some money during your lifetime or you choose to downsize your home to a less expensive property.
The main issue with this option is that you risk incurring potentially large early repayment charges. You will need to weigh this up against the interest that you will save by ending your plan early.
Remember though, some lenders will waive early repayment charges in certain scenarios.
Example 1: Mr and Mrs Green decide that their 4-bedroom detached home is too big for them now. They find the perfect 2-bed bungalow and sell their home to buy it, paying off their equity release loan at the same time. There are no early repayment charges to pay as their plan has Downsizing Protection built in. In this case, their lender lets them downsize penalty-free within five years of arranging their plan.
Example 2: Mrs Preston comes into a large cash lump sum from a life insurance policy when her husband passes away. She decides to downsize and pay off her equity release loan at the same time. She finds out that her plan has Significant Life Event Exemption, so she doesn’t have to pay ERCs by downsizing within three years of the death of her spouse.
Example 3: Mr Jenkins inherits a large lump sum of money from his elderly parents. He decides to pay off his equity release plan to protect his own children’s inheritance. His equity release plan is still within its 15-year fixed term for early repayment charges, so he will incur charges. As he only has two years left to go, the penalty is just 1% of his overall loan so he decides to go ahead.
Read more about repaying your plan early and early repayment charges in our article: “Can you pay back equity release early?”
Making regular voluntary repayments on your plan
Not all repayment options involve ending your plan early. You may choose to pay off just some of your loan to minimise the interest that accrues on it.
Some lenders will allow you to repay a percentage of your overall loan every year. For instance, Aviva and Canada Life both allow you to repay up to 10% of your overall loan in each 12 month period.
Example: Mrs Chadwick chooses to make voluntary repayments on her plan every couple of years to protect her home’s remaining equity from being eroded by interest. When her plan comes to an end, her children have a smaller equity release loan to pay from the sale of her home.
Interest-only plans
The last of our equity release repayment examples, this option is ideal for those who want to prevent or minimise the effect of interest on your loan. With an interest-only lifetime mortgage, you agree to pay off the interest each month or year so your loan never increases.
You can choose to stop making these voluntary interest payments at any point. If you do this then your plan will switch to a standard roll-up plan and the compound interest will begin to add to your loan each month.
Example: Mr McColl chooses an interest-only equity release plan to pay off the capital on his interest-only mortgage when the term ends. He keeps up with the monthly interest payments for ten years and then decides to let his plan switch to a standard roll-up so he can enjoy a bigger disposable income each month.
