Can you pay back equity release?

What is equity release?

Many homeowners aged 55 and older in the UK turn to equity release to finance their retirement. 

‘Equity release’ refers to various products that allow you to access the equity tied up in your home in your later years.

You have the option of taking the money in a series of smaller payments, as a lump sum or as both a lump sum and smaller payments.

When releasing equity, you do not need to make required payments. The most popular equity release product in the UK is the lifetime mortgage, which usually accrues interest at a fixed rate. 

The borrowed amount and interest are only due to be repaid when the last homeowner moves into full-time long-term care or passes away.

In the UK, these products must have the Equity Release Council’s (ERC) no negative equity guarantee, which protects your estate from debt by ensuring you will never owe more than the value of your home when it’s sold.

Can I pay back equity release?

While not a condition of the loan, you can pay back equity release during your lifetime. 

There are various ways of doing this, including paying back the interest, making a partial repayment, or paying the amount back in full.

However, it’s important to remember paying back equity release might result in early repayment charges.

What is an example of paying back equity release?

We’ll now look at an example of paying back equity release.

Let’s say that your spouse is in a care home, and you live alone. Your health worsens to the point where your family decides to find a suitable care home.

After moving into the care home, your home is sold, and the equity release is repaid.

Can you pay back equity release early?

You can pay back equity release early, but it might not be beneficial. Early repayment or higher payments than you agreed to in your offer could result in early repayment charges.

If you’re considering the possibility of early repayment, it’s important to compare the interest saved with the early repayment charge.

That said, some equity release schemes have a repayment option that makes early repayment easier.

When do you not have to pay early repayment charges?

Early repayment charges are not always a feature of paying back equity release, but this varies depending on the product and lender.

A few circumstances where you might not need to pay early repayment charges include:

1. Downsizing protection: If you want to downsize by moving to a smaller home and repay the entire equity release loan, your lender might offer downsizing protection. This allows you to pay back the outstanding balance before the end of your lifetime mortgage without additional charges.
2. Moving home: If you have a lifetime mortgage from an ERC-approved lender, you can move your plan to another property if your new home meets the lender’s criteria. Depending on your agreement and the property value, you might not need to pay back your equity release.
3. Voluntary overpayments: Some equity release plans let you make partial repayments of up to 10% of the borrowed amount each year without early repayment charges.

How do you pay back equity release?

How you pay back equity release depends on whether your scheme is a lifetime mortgage or a home reversion plan.

If you have a lifetime mortgage, you have the option of paying all or some of the interest. 

Some plans even let you pay back more than the total interest, allowing you to reduce the capital you owe.

In the case of a home reversion, you must buy back the portion of your home you ‘sold’ to the lender. As you’ll need to do this at the current market value, it probably will cost you more than the lender paid for the share.

The three main ways of paying back equity release include:

1. Paying back the interest
2. Partial repayment
3. Paying back in full

Paying back the interest arguably is the most common and potentially beneficial way, as it can mitigate the impact of reducing your estate’s future value and any impact on your entitlement to means-tested benefits.

What are the early repayment charges for equity release?

Early repayment charges for equity release are additional fees lenders may charge when you make originally unplanned repayments.

These charges cover the potential loss of income for the lender due to the reduction of capital or interest owed. However, this depends on the lender and should be clarified before you agree to an equity release scheme.

The three different early repayment charges include: 

1. Fixed-rate: With a fixed rate early repayment charge, you know upfront the exact amount it will cost to repay early, which is usually cheaper than the other types.
2. Variable-rate: These rates are usually calculated as a percentage of the initial amount you borrowed and the remaining time on your equity release scheme. The rate should be included in your initial agreement.
3. Initial borrowing vs. balance: Some lenders calculate early repayment charges on the initial amount borrowed, while others calculate them on the remaining balance, resulting in charges that can vary significantly.

Get expert financial advice

The scheme you choose ultimately determines your repayment options and any early repayment charges that apply.

Given the many options available, you can find an equity release scheme to suit your needs, and you should ensure you get trusted financial advice. 

You can quickly find a qualified mortgage broker through Unbiased for expert financial advice.