Equity Release With Low Early Repayment Charges

You may be wondering why anyone chooses to repay their equity release loan early, when one of the advantages of equity release is the fact that you do not have to repay it by a certain date, in contrast to a conventional loan.

Firstly, some people try to be in as little debt with equity release as possible, and repaying the loan is the easiest way of doing this. They can get on top of the compound interest by paying off the monthly interest, and perhaps paying off some of the loan amount.

Avoiding equity release debt means that there will be more money left over for your beneficiaries when you pass away.

The equity release provider will only take the amount of money that they are due from your house sale, and the remainder can go to your loved ones. If the amount owed is minimal, your family will inherit more money from you.

Secondly, if you want to change your equity release plan, or stop equity release completely, you have to repay your loan. Otherwise, the equity release provider may not allow you to make any changes, as they do not want to be left in debt.

Some reasons people choose to change their plan are: they want to switch to lower interest rates, they want to change from monthly loan amounts to a lump sum, or they want to start making contributions to the loan amount without being penalised.

As for leaving the scheme completely, motivations can include: wanting to avoid debt, wanting to leave more funds to one’s family after death, and wanting to move home.

Please call our 24-Hour Helpline: 0330 058 1579

Should I Avoid Repaying My Loan Early?

There are pros and cons of repaying your equity release loan early. By repaying your loan, you can have more flexibility in your equity release plan, you can avoid high interest, and you can be in less debt. In certain situations, this is the best thing to do, as it will give you financial freedom.

On the other hand, there are many downsides to repaying your loan early. The main one is the early repayment charges, which we will discuss later.

Other reasons to avoid early repayment are: it can reduce your disposable income, there are limits to the amount you can repay, and it may not be worth it given that there is no penalty for avoiding repayment.

The type of equity release plan you have, and the lender you are with, is what will determine whether repayment is sensible, or whether it will complicate the scheme.

For example, if you are on a plan that allows you to repay early with no penalties, it would be very wise to make repayments. However, if there are penalties in place, and you are already struggling to manage your money, it would not be a good idea.

What is the Equity Release Early Repayment Charge & Why Does it Exist?

Below, we answers to common questions about equity release early repayment charges:

1. What is the early repayment charge?

The equity release early repayment charge (ERC) is a financial penalty that stops customers from paying back their loan early. The cost of early repayment is not standardised, as it depends on the regulations of the equity release provider, and the rules of the equity release product.

Equity release early repayment charges can be fixed or variable. If there is a fixed charge, you will already know what the fee is before you make the decision to repay the funds.

Often, the fee decreases each year. For example, you could pay 10% in the first year, 9% in the second year, 8% in the third year, and so on.

In this example, the ERC may disappear completely after the tenth year. This means you would not have to worry about paying a fee if you have been an equity release customer for over ten years.

Sometimes, the fee is the same regardless of how long you have been an equity release consumer. Equity release companies tend to charge 5 of the initial loan amount or the outstanding balance, though the fee is much lower than this with certain companies.

The other type of ERC is a variable charge. If your lender has a variable charge, you will have to get in touch with them to find out what the current early repayment fee is.

Variable rates work on government gilts, meaning they vary depending on whether the gilt yield has increased or decreased since you have been on the equity release scheme.

2. Why does the early repayment charge exist?

The reason equity release providers charge you for early repayment is that they need to make money. Lenders have to wait many years before earning money from equity release, as they only get their funds back when the customer’s property is sold.

To ensure they profit from equity release, lenders will charge compound interest on the loan. If you repay the loan early, you are avoiding these compound interest charges, which disadvantages the lender. For this reason, they charge extra for early repayment, and this prevents them from losing money.

3. Is there an early repayment charge for home reversion plans?

It is sometimes trickier to make changes to your equity release plan when you have a home reversion, as the provider already owns some of your home.

You could raise funds to pay off your loan by selling your share of the home, without incurring an early repayment fee.

However, if the value of your share is not sufficient, you may struggle to have enough money to purchase a new property after equity release. Your best option may be to request an alternative property from the equity release lender.

This will not allow you to leave the equity release scheme, but it will be helpful if your issue lies with the current property you are living in.

Please call our 24-Hour Helpline: 0330 058 1579

How to Secure Equity Release With Low Early Repayment Charges

Fortunately, it is possible to get equity release with low early repayment charges. All you need to do is research the different repayment charges that are associated with lenders and plans in your area.

A much faster way of doing this would be to make an appointment with an equity release specialist and ask them about early repayment charges with different lenders and products.

They will already be aware of the various charges, and they will recommend lenders and plans with low fees.

We offer this service at Equity Release Warehouse, so you can contact us and explain that you would like to pursue equity release with a low ERC.

When you are finding a plan with a low ERC, it is not as simple as looking for the lowest percentages, which is why we recommend that you seek professional equity release advice.

For example, one lender may advertise low ERCs, but in fact their rates are variable, which means they could rise unexpectedly.

They may also have the same rate throughout the years, which means it would never become less expensive for you to repay your equity release loan.

Other lenders may appear to charge a very high rate, but this rate may quickly go down in the first five years. It could also be a fixed rate that is unaffected by government gilds, which means it is more reliable (though it could also prevent you from accessing a great deal).

Please call our 24-Hour Helpline: 0330 058 1579

How to Avoid Early Repayment Charges Altogether

It is possible to avoid ERCs completely, but you have to plan to do this before making an equity release application. Here are some of our best tips for avoiding ERCs:

1. Get downsizing protection

Downsizing protection comes with some equity release products. It means that you can move house at any point during the equity release scheme without getting an ERC (1).

Customers can make use of downsizing protection when they want to move into a property that does not meet their lender’s requirements.

However, this type of protection against ERCs is only helpful if you are planning on moving house during the equity release scheme.

If you want to repay the loan early to avoid compound interest, or for any other reason, you may need to take an alternative route to downsizing protection.

2. Port your equity release plan

If your motivation behind repaying your loan is that you want to move house, you do not always have to leave equity release behind.

Many equity release providers are happy to keep you as an equity release consumer if you find a new property that meets their criteria.

The property will have to be assessed for its condition, location, value, and other factors that determine whether it is an appropriate home for equity release.

If the provider approves the property, you can port your equity release plan with you, which means it is transferred to your new home.

Some aspects of the plan may change, such as the loan amount and the interest. You will hear about this before making the move, so you can compare the details of each plan and decide what works best for you.

You will not always be able to port your equity release plan to a new home. Some lenders never allow this, and some plans are not compatible with this. For example, if you have a lump sum lifetime mortgage and you have already spent most of your money, it may not be possible for you to do this.

It is always worth reaching out to your equity release company and asking them about their rules for ERCs. You may find that they are much more flexible than you would expect, as they hope to keep you as a customer for the rest of your life.

Please call our 24-Hour Helpline: 0330 058 1579

3. Get a repayment lifetime mortgage

By getting a repayment lifetime mortgage, you can pay off some of your loan or interest without incurring an ERC.

With an interest only lifetime mortgage, you can pay off a set amount of interest, or even the full amount, every month. You will not be penalised for this, as it is a requirement of this equity release product.

The voluntary repayment lifetime mortgage allows you to pay back the loan on your terms. You could repay a set amount each month or year, or you could repay an amount when you have spare cash.

This does not mean that you can pay back all of your loan at once, as there are usually some limitations.

However, it does mean that you will not have to deal with an early repayment fee, as this type of equity release allows you to get involved with early repayment whenever you want to.

4. Get a plan with a short early repayment charge period

It can be tricky to find a plan that does not have any ERCs, but it is much easier to get one that only imposes a fee after a certain amount of time.

We advise looking for a plan with a short ERC period, which means the charge is only applied for a short amount of time.

For example, there are schemes that stop charging a fee after three years, or five years. You would have to wait for this period to be over, but then you could repay as much of your loan as you desired.

Please call our 24-Hour Helpline: 0330 058 1579

Myths About Equity Release Early Repayment Charges

Some people are worried about equity release ERCs as they have heard horror stories, and they do not want to end up worse off by pursuing equity release.

One myth about equity release ERCs is that they are set at 25% for every plan. This is the maximum amount that a lender can charge, but it does not mean that you will be charged this.

In fact, nowadays, most lenders are charging much lower amounts, as they want their plans to be more flexible than ever.

Another ERC myth is that it always goes down after a few years. Some lenders do work based on this system, which benefits their loyal customers.

However, it does not always work like this. Some equity release customers will be faced with the same ERC regardless of when they first took out equity.

This is disappointing for customers who have been around a long time, but it is great for people who took out equity recently and would like a change.

Finally, there is a myth that the ERC is always a percentage of the loan amount. This is sometimes the case, and it means that the rate can be very high, depending on how much money you released from your property.

However, the ERC is sometimes a percentage of the outstanding balance of the loan. If you have managed to repay some of the loan, this could make the ERC lower.

Yet, if you have not repaid, the compound interest will have risen, and this could result in a much higher ERC.

Please call our 24-Hour Helpline: 0330 058 1579

Professional Advice On Equity Release With Low Early Repayment Charges

We offer appointments for anyone who is considering equity release, regardless of where you live, what your finances look like, and whether you are married or single.

Our customers come from a range of backgrounds, so do not be put off equity release if you don’t fit the stereotype that you have been sold by the media.

As well as offering general advice on equity release, we can tell you more about equity release with low early repayment charges. Our team are experts in this topic, so they are ready to introduce you to excellent plans with low ERCs.

You may believe you do not need a product with a low ERC, as you are not planning on repaying your loan or exiting equity release.

However, we would recommend having a low ERC as a safety net. Your individual circumstances could change a lot, and it may one day be wise for you to repay your loan.

When that day comes, you do not want to be faced with high repayment charges.

Having said that, you could choose to opt for a plan without a low ERC, that has various other benefits.

Though we would advise you of the risk of this, we would not stop you from going down this route. There are many different ways to do equity release, and different clients benefit from different paths.

To get an appointment about equity release with low early repayment charges, call us on 0330 058 1579 or fill in your details here.

Our lovely staff can answer any questions you have about equity release, as they help clients with applications every single day.

They can also discuss different schemes that can provide you with financial stability in retirement, as they know that equity release comes with its risks.

That being said, most of our clients find that equity release works brilliantly for them, so we are hopeful for you.

References

[1] Equity Release Terms https://nationaldebtline.org/fact-sheet-library/equity-release-ew/#:~:text=Equity%20release%20is%20an%20agreement,regular%20smaller%20payments%2C%20or%20both.