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Can You Repay Equity Release Early? Quick Answer

repay equity release early

For free and impartial money advice and guidance, visit MoneyHelper, to help you make the most of your money.

Can you repay equity release early? For various reasons, people who take out equity release plans may want to get out of their plan completely, or make some earlier repayments to increase the inheritance they pass on. But is this possible?

We recap on equity release in the UK before answering this important question and related queries. 

What is equity release?

Equity release is a way for older homeowners to access a tax-free lump sum or drawdown facility without being forced to make monthly repayments on the principal amount of interest. 

The homeowner accesses some of their home equity and only repays the money when they sell their home. They cannot be forced to leave their home or sell their home unless they move into long-term care. Otherwise, the money will be repaid through the sale of the property from their estate after death. 

You’ll need to be at least 55 years old and in some cases at least 65. You must only release equity from a main residential property with no existing mortgage and a value of at least £75,000. 

There are three types of equity release schemes in the UK, namely a lifetime mortgage, enhanced lifetime mortgage or home reversion scheme. Only ever get equity release plans from a company that is authorised and regulated by the Financial Conduct Authority. You should also ensure the company is a member of the Equity Release Council as these lenders must offer:

  1. A guarantee that you’ll never be evicted from your home under normal circumstances
  2. A negative equity guarantee so the eventual debt never exceeds the sale value of your home
  3. Downsizing protection so you can downsize to a suitable property when required. Downsizing protection can also mean you won’t be penalised for having to repay some of your equity release plan early.
  4. And many more rules that benefit the homeowner

Using a company that is not a member of the Equity Release Council will not afford these benefits and additional assurances. 

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What is the catch with equity release?

The major downside of equity release is the total cost of having one of the aforementioned plans. The amount you release in equity could double as a debt attached to your home and it shouldn’t be viewed as free money. Although technically this is not a ‘catch’ as everything should be explained to you by an independent financial adviser first. 

Can equity release be paid off early? (The quick answer)

Equity release can be paid off early or you can make monthly repayments to reduce the total debt owed from the eventual property sale. However, it may not be this simple and any early repayment charge can be excessive. If you want to move home, you may not have to pay off your equity release early if your lender is a member of the Equity Release Council

Keep reading to uncover more on paying back equity release early and early repayment charges. 

What is the purpose of equity release?

The primary purpose of equity release is to give senior homeowners more financial stability in later life, which could be used for general retirement purposes, home renovations to make the property more suitable for elderly living, or even private at-home care. Others might just want to release equity to enjoy their retirement with cruises and holidays abroad. 

A smaller percentage of people use the money to give to their family, so they can buy a property or start new businesses. If the money is gifted within seven years of death, this money is subject to inheritance tax laws.

The conundrum with equity release schemes is that they are expensive over the long term and this significantly reduces the amount you can pass on as inheritance. Parents with children who would significantly benefit from 100% of the property sale in the future will have a more difficult decision to make. Those who do not have children or anyone that will benefit from their estate will find releasing equity an easier decision to make.

Lifetime mortgages explained

A lifetime mortgage is the most used type of equity release plan in the UK. It works by providing the senior homeowner with a loan equal to a percentage of their equity. For example, they may release £65,000 (33.3%) of a £195,000 property. This is charged with a fixed interest rate. Both the loan and interest do not need to be paid back until the property is eventually sold as explained above. 

If the owner of the home moves into long term care after 12 years of their lifetime mortgage, a standard 6.4% interest rate would have created a total debt worth around £137,000. This means the company would take £137,000 from the sale proceeds of the home and the remaining money would be for the homeowner. If the homeowner had died rather than going into care, the rest of the sale proceeds would be put back into the estate for the estate beneficiaries. 

An enhanced lifetime mortgage is the same as above but is aimed at people with lesser life expectancies, such as those with a terminal disease. By submitting a health questionnaire and possibly medical records, these lifetime mortgages can allow the homeowner to access more of their home equity as cash. 

Can you pay off a lifetime mortgage early?

As the name of these equity release schemes suggest, a lifetime mortgage is supposed to be for life and not paid back until after death or entering into long-term care. However, in some rare circumstances, you may wish to pay off your lifetime mortgage early. This is possible but it will trigger an early repayment charge.  

Early repayment charges can be expensive on all types of loans and mortgages. But they are notably expensive on most lifetime mortgages. If you might repay equity release early it is best to get professional advice first. 

One reason you may decide to pay it off early is if you win a large amount of money and your family has a sentimental attachment to the property. By paying it off early, you can pass 100% of the home to children or grandchildren. 

Home reversion scheme explained

A home reversion scheme is less common than lifetime mortgages but still used throughout the UK. In a nutshell, they work by trading in a percentage of your home equity for a greater percentage in the future. You might receive 30% of your home equity as a cash lump sum or drawdown, but have to give up as much as 70% of the property’s future sale value. No added interest is charged. 

If your property value increases over time before it is eventually sold, you are paying even more for a home reversion plan. But if it decreases in value, the lender’s profit margin on the loan also decreases. 

Can you pay money back on equity release?

Other than the possibility of exiting your equity release plan entirely and paying early repayment charges, you might just want to pay back some of the total debt. 

Those with a lifetime mortgage may decide to voluntarily pay back some or all of the interest they are charged. This is usually possible depending on the lender and your mortgage terms. If you are only paying off the interest, you will not be hit with an early repayment charge. 

Can you pay back equity release monthly?

No equity release scheme requires you to make monthly repayments. The loan amount and any interest are only required to be repaid from the future sale proceeds of your property. 

However, if you have a lifetime mortgage, you may want to make ongoing monthly interest repayments to prevent the interest from rolling up and creating a substantial debt. In many cases, you can opt in to make monthly repayments to clear all or some of the interest owed. But some equity release providers may not allow this. 

Why would you choose to repay early?

One reason you may choose to repay your complete lifetime mortgage or home reversion plan early is if you have come into money you weren’t expecting and you want to pass on your home to children. If you won money or inherited money yourself, you may decide to repay the equity release early so your children get a financial benefit in the long run. This is even more attractive if your property has significantly increased in value during the course of your equity release plan.

The common reason for wishing to make monthly interest payments is to keep the total debt as low as possible. Some homeowners feel guilt for not passing on 100% of the property to loved ones who would financially benefit from the property. 

By committing to ongoing interest payments, they can keep the total debt as low as possible and ensure that their estate beneficiaries still have a financial gain from their property. Moreover, if they keep the debt as low as possible, it may become possible for the estate beneficiaries to pay off the debt and keep the property – which again may have increased in value and be worth doing. 

What are early repayment charges on equity release?

Early repayment charges on equity release are usually calculated as a percentage of the outstanding debt. This is true of early repayment charges on other credit agreements. 

However, with other credit the longer the agreement goes the more you pay back and the less you owe, resulting in a lesser early repayment charge. But as lifetime mortgages work the other way – i.e. the longer they last the more you owe – these types of charges can become more expensive as time passes, and they can get to a point of becoming unaffordable for most people. 

Why do equity release lenders apply early repayment charges?

Equity release lenders apply early repayment charges so they can cover their own back. When they offer you a lifetime mortgage, they provide you with the terms of the deal such as the interest rate. These terms have been meticulously calculated to limit lending risk and ensure the lender makes a profit. 

When you choose to repay some or all of your mortgage early, you are forcing the lender to disregard their deal and their calculations. And as a result, they charge you for ending the agreement and try to recover any future loss of profit made on the deal. 

What if I want to move home?

If you want to move home to a suitable alternative property with the same or a higher valuation, you should be able to do this without having to pay off your equity release early. Members of the Equity Release Council must allow you to move to suitable properties and take your existing plan with you, so there’s no need to repay early. 

When you receive financial advice before taking out equity release, you should mention any plans to move or downsize in the future. 

What if I want to move to a less valuable home? (downsizing protection!)

The council also promotes downsizing protection which we referenced at the start of this MoneyNerd guide. If you want to move to a smaller home and take your existing lifetime mortgage with you, downsizing protection enables you to pay off the difference and not incur any early repayment charges. 

What happens when you repay your equity release plan in full?

Once you have repaid your equity release plan early and in full, and have paid any early repayment charges, you will be able to pass 100% of your property to a single person or group of people when you die. 

By passing on 100% of a property to a child or grandchild, you can simultaneously increase the inheritance tax threshold on your estate by £150,000. This can be especially beneficial if you’re a wealthy person and some of your estate would be subject to inheritance tax. 

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In this guide, we have answered just one of many frequently asked questions about equity release schemes in the UK. For much more information, definitions and clear examples on equity release, check out MoneyNerd now. 

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