What is equity release downsizing protection?

The handy feature helping homeowners to pay off plans early without penalty

If you are thinking about equity release, it’s particularly important to consider if downsizing might be in your own retirement plans. You may wish to choose an equity release product with built-in downsizing protection to give you extra reassurance about your options.  

After perhaps many years of accumulating memories in our home, retirement motivates many people to consider downsizing to a smaller property. If you live in a large house with more rooms than you need, do you want the hassle of maintaining it all in later life? 

As well as making life a bit easier, downsizing to a smaller house, or one in a less expensive area, can also free up some extra cash.

But how does downsizing work if you have taken out an equity release plan? To help you understand how providers support customers who choose to downsize some time after taking out equity release , we have put together the following guide:

• What is equity release?
• What is equity release downsizing protection?
• How does it work?
• Can I transfer my equity release plan to a new property?
• Other exemptions to equity release early repayment charges
• What do lenders say about equity release downsizing protection?

What is equity release?

If you are aged 55+ and own your own home, even if there is some outstanding mortgage, you may be able to free up some tax-free cash with an equity release plan. Equity release lets you do this without having to sell or move home.

Equity release may appeal to you as you won’t have to make mandatory monthly repayments. That’s because the loan itself and any accrued interest are typically repaid through the sale of your property when you pass away or move into long-term care. 

What is equity release downsizing protection?

Equity release downsizing protection is a feature offered by some providers to protect homeowners from incurring penalties in certain circumstances when moving home after arranging a plan. 

Most providers allow you to move your plan, penalty-free, to another property that meets their lending criteria. With this option, you still owe the money you borrowed through equity release, plus accrued interest. The only change is that the loan will be secured against your new property when you move.

But what happens if you want to sell your home and pay off your equity release plan altogether in the process? Or, you wish to take your plan with you but find that your new home doesn’t meet your lender’s criteria, and therefore have to pay off your plan in order to move?

You may find that in normal circumstances you would incur potentially hefty early repayment charges (ERCs) by repaying your loan in full early.

But, for those eligible for downsizing protection, equity release customers may still be able to move home and repay their lifetime mortgage early without incurring ERCs.

How does it work?

Each provider has their own rules on downsizing protection, and not all of them offer it. If your provider does, they will specify the timeframe or circumstances when early repayment can occur without penalties.

For instance:

• If a provider does offer equity release downsizing protection, customers typically need to have had their equity release plan in place for a minimum of three or five years to be eligible. 
• Some providers offer downsizing protection to any eligible customers who want to downsize and pay off their plan in the process. However, some only offer it to those who wish to move their plan to their new home but find that it doesn’t meet their lender’s criteria.
• Some providers offering downsizing protection waive charges if you repay your plan within, for example, three years of your spouse or partner passing away or moving into long-term care (in the case of a joint equity release plan).

Can I transfer my equity release plan to a new property?

All plans from providers who are members of the Equity Release Council give homeowners the right to move their plan to a suitable property without penalty. However, this only applies if your new home meets your provider’s lending criteria. 

This right to move home is one of the Council’s guarantees. There are others that homeowners will benefit from by choosing an Equity Release Council approved plan. You can read about the guarantees here.

But if the new property doesn’t meet your provider’s criteria and you’d still like to move to that property, then your plan will need to be repaid in full. This typically means that an early repayment charge might apply, depending on your provider’s terms and conditions.

However, if you take out a plan with downsizing protection, your equity release provider may allow you to pay off your loan and move to that property, without incurring any ERCs. Naturally there may be some terms and conditions related to your eligibility.

Other exemptions to equity release early repayment charges

Equity release is typically a lifetime commitment, but providers do understand that plans and circumstances can change. Before making your decision, it is important to understand any applicable early repayment charges (ERCs) on your plan before going ahead.

ERCs vary between lenders, and in some cases they can work out to be quite high – especially if you have had your plan just for a short time. This is one of the potential pitfalls of equity release, so you will need to weigh this up against any money you might save in interest by ending your plan early.

The good news is that, in addition to downsizing protection, there are other exemptions to early repayment charges. This means that you or your estate may not incur any penalties by paying off all or some of your plan early.

For example, you typically won’t face any early repayment charges when:

• The fixed term for early repayment charges has come to an end.
• You sell your home and transfer the plan to another suitable property.
• You make penalty-free partial repayments, typically up to 10% of the amount you borrowed each year, until your loan is repaid in full. Some plans allow you to repay an even higher percentage each year without incurring ERCs.
• Your plan includes Compassionate Early Repayment Charges or Significant Life Event Exemption. These typically allow you to repay your loan without penalty within up to three years of your partner passing away or moving into long-term care.

Do let your equity release adviser know if you think you might one day want to pay off your plan early. They can search for a plan with short fixed-term ERCs, for example.

What do lenders say about equity release downsizing protection?

There are several equity release providers, each with their own stance on downsizing protection. To give you an idea of what to expect, here are what a few of the big name providers say about this feature.

Aviva

If you have had your plan for three years or more, you can move home and repay early, penalty-free, if your new home does not meet their lending criteria. 

Pure Retirement

If one homeowner passes away or moves into long-term care, the surviving homeowner can usually repay the plan within three years, penalty-free. 

If you have had your plan for five years or more and want to take your plan to a property that doesn’t meet Pure’s lending criteria, they will waive their ERCs. However, you must have the intention to move your plan for the ERCs to be waived.

If you have had your plan for fewer than five years, you can downsize to a suitable property and make a partial repayment to make the loan fit, without incurring any ERCs.

Just

No early repayment charges if the plan is repaid within three years of the death of one homeowner, or if they move permanently into long-term care.

ERCs will be waived if you sell your home and need to make a partial repayment in order to transfer your plan to a less expensive property. Your new property must meet their lending criteria. 

Canada Life

If you have your plan for five years or more then you won’t have to pay any ERCs if you want to repay the loan because you are selling your home and moving to a different property.

On some of their plans, you will not need to pay an early repayment charge if you repay your plan within three years of the first borrower passing away or moving into long-term care. This is called their ‘Early Repayment Waiver’.

Speak to a specialist

If you’re thinking about equity release with downsizing protection built in, nothing beats having a conversation with a specialist who will know which plans would work best for you.

At Equity Release Wise, our selected advisers can  give you all the guidance you need to make an informed decision. They are members of the Equity Release Council, giving you reassurance that you’ll get the guarantees and safeguards that their approved plans offer.

For extra peace of mind, all the initial equity release advice you receive will be free of charge, regardless of how many quotations you request or questions you ask. In fact, you will only receive a fee for advice if you choose to go ahead with a plan. 

Get an estimate of how much you could release with our equity release calculator, or call our friendly team today on 0800 096 2215 or request a call back to arrange pressure-free advice and information. 

About Clare Yates. With over a decade’s experience writing about later life financial planning, Clare offers a wealth of knowledge about equity release, pension annuities, wills, LPAs and more. When she isn’t writing, Clare likes to spend her time baking and going on walks with her husband, two children and their rescue dog. Follow Clare on LinkedIn