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Equity Release with Repayment Option – What You Should Know

Equity Release Repayment Option

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

Can you get equity release with repayment option? Equity release is renowned as a way of accessing money without needing to make any monthly repayments. So can you get equity release and make repayments – and if so, why would you want to?

In this guide, we revisit the basics of equity release in the UK before asking if you can make voluntary repayments on your plan and looking at early repayment charges. If you want to pass on more of your wealth despite using equity release, you should hear this! 

What is equity release?

Equity release schemes – such as a lifetime mortgage – are ways for senior homeowners to access some home equity as a cash lump sum or drawdown. This money is a loan but does not have to be repaid through monthly instalments like other forms of personal credit. 

To qualify for an equity release plan you must meet an age requirement, usually at least 55 years old, own your house without an outstanding mortgage, and the property must be of a minimum value. Properties worth less than £75,000 may be excluded from equity release plans. 

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Does equity release have to be paid back?

Equity release might not need to be paid back through monthly repayments, but the money the senior homeowner receives is still a loan and needs to be paid back, usually with interest

The homeowner pays back the debt when their home is sold. The sale proceeds of their home are first used to pay back the lender. However, the lender cannot force the homeowner to sell their home unless they move into long-term care. If they do not move into care, the home is sold from the homeowner’s estate after death. 

This means equity release will eat up some of the inheritance you would have given to loved ones. 

What is the catch with equity release?

There should be no ‘catch’ with equity release because all the details of your equity release plan and full costs should be meticulously explained by a financial adviser first. But the biggest drawback of equity release is that it can be costly. 

As will be illustrated in the following section, both a lifetime mortgage and home reversion plan can easily double the amount you have to pay back – or more!

Equity release in detail

There are two ways you could release equity as a senior homeowner in the UK. You could use a home reversion plan, or you can use the more popular lifetime mortgage, which also has slight variations. Learn about a standard home reversion scheme and lifetime mortgage with examples here:

Home reversion plan

A home reversion plan lets the homeowner access a percentage of their home equity as a tax-free lump sum or drawdown. This loan is not charged with any interest, but the homeowner must agree to give the lender a much greater percentage of the property’s future sale proceeds. If the property increases in value, the cost of the home reversion plan is even bigger.

For example, let’s imagine you have a £200,000 home and want to take out 25% equity. You receive £50,000 from an equity release lender and do not make any repayments. Due to poor health, you have to move into a care home a decade later. At this point, the home is worth £230,000 and must be sold to repay the £50,000 loan. However, you agreed to pay back 60% of the sale proceeds, meaning the lender collects £138,000 in return. 

Lifetime mortgage

Lifetime mortgages work differently from home reversion plans. With a standard lifetime mortgage, the homeowner can access a lump sum or drawdown worth up to 60% of their equity at the most. This money is charged with a fixed interest rate which rolls up, making the debt grow bigger each month. Once the property has to be sold, the total debt is repayable from the sale proceeds.

Because the interest keeps rolling up, the amount you could owe with a lifetime mortgage can be double or more depending on how much equity you released, the interest rate agreed and the duration of your lifetime mortgage. 

Can you make repayments on equity release?

Yes, it is possible to make repayments on your equity release plan and it is most common with lifetime mortgages. There is even a variation of a lifetime mortgage called a repayment lifetime mortgage that allows voluntary interest repayments.

Repayment lifetime mortgages

A repayment lifetime mortgage works exactly the same way as a standard lifetime mortgage, but it allows the homeowner to make voluntary interest repayments each month to keep the debt lower. Because these interest repayments are voluntary, the homeowner can decide how much they wish to pay back and can change the amount each month in most cases. 

Note that some lifetime mortgages allow voluntary repayments without specifically being called a repayment lifetime mortgage. This is also equity release with a repayment option. 

Other variations of a lifetime mortgage include a drawdown lifetime mortgage or enhanced lifetime mortgage. 

How much interest do you pay back on equity release?

The standard interest rate on lifetime mortgages ranges from 2-10% depending on the lender, the property and how old you are when you apply. The older you are when you apply the lower the interest rate usually is because logic suggests older people have shorter life expectancies, and thus, the credit agreement is less of a risk if the property will be sold sooner. 

To put this in perspective, let’s use an example of a lifetime mortgage. If you want to take out £65,000 equity at a standard rate of 6.4%, and you have your lifetime mortgage for 12 years, the total debt will have grown to £137,000 if you make no voluntary repayments during the course of the mortgage. 

Should you make voluntary interest repayments?

People choose to make voluntary interest payments on their equity release plan so the total debt is lower when the home has to be sold. This is primarily done to ensure less of their estate is taken by the lender and more of it is directed to loved ones. This can be a good way of getting the money you need but also ensuring beneficiaries get more from you. 

On the other hand, if you do not have anyone to leave your inheritance to or your beneficiaries are already wealthy, it may not be advantageous to make voluntary repayments. 

Overall, the best way to answer this question is with personalised advice from an equity release advisor. Make sure to choose independent financial advice that is authorised and regulated by the Financial Conduct Authority.  

Consider the negative equity guarantee

There may be situations when making voluntary repayments is not worth it, or is no longer worth it due to a guarantee that your lender has agreed to honour. 

Lenders that are members of the Equity Release Council must commit to a negative equity guarantee. This guarantee states that lenders must not recover debts that exceed the property’s sale value. So if the total debt is now greater than the property value – either because the debt has grown over many years and/or because the property value has decreased – they cannot try to collect the shortfall. In this situation, it would not be in the homeowner’s financial interest to keep making voluntary repayments.

Can you repay an equity release loan early?

Lifetime mortgages and home reversion plans are both meant to last until you die or move into care. But it is still possible to exit the credit agreement at a cost. Just how you can pay off a residential mortgage early, you can also pay off your equity release plan early. But in both cases, the homeowner will be hit with early repayment charges. These early repayment charges can be expensive. 

What are the early repayment charges on equity release?

Most equity release plans will have early repayment charges that are triggered whenever the homeowner repays some of all of their plans. The amount you are charged will dhousepend on how much you are repaying early. To repay the full plan, the early repayment fee can be huge and is usually unaffordable to most people. The full costs should be explained within your agreement and by your adviser. 

You might be wondering what situation would result in only some of the equity release plan being repaid early. The most common example is when a homeowner with a lifetime mortgage decides to move or downsize to a less valuable property. This can be accepted and the equity release plan switched to the new property, as long as the homeowner agrees to repay some of the loan early. But this could then trigger early repayment charges.

The good news is there is a way around these costs… 

What is downsizing protection?

Downsizing protection or a downsizing clause can be present or added to an equity release plan. This clause ensures that if the homeowner decides to move to a less valuable home, they are allowed to repay the required amount of the loan to do so and not be subject to any early repayment charges. Downsizing protection can save the homeowner thousands of pounds.

If you have plans to downsize or move home in the future, it’s important to let your financial adviser know about this from the outset. They can adjust their search to make sure your credit agreement includes downsizing protection. Failing to mention your plans can be costly. 

Can estate beneficiaries pay off my equity release?

After death, the estate beneficiaries are given a period of time to sell the property and repay the equity release plan. Sometimes the length of time is as long as one year. 

However, lenders will also welcome other methods of repaying the debt, such as finances from the estate or the beneficiaries themselves. If they pay with money, the home does not need to be sold and can be kept in the family. This may be preferable if the family has sentimental ties to the property or if the property has surged in value. 

How to choose an equity release adviser and broker

An equity release adviser provides mandatory guidance and information before agreeing to an equity release plan in the UK. Most of them will also extend their service to help you find a provider and make your application. Because equity release is almost certainly an irreversible decision with hygge financial consequences, it’s important to seek the very best advice.

You should use an adviser that has lots of experience dealing specifically in equity release, rather than a general financial advice or mortgage adviser. Furthermore, you should only use advisers that are regulated by the FCA and members of the Equity Release Council. 

Will equity release affect my entitlement to a state pension?

Taking out an equity release plan does not affect your entitlement to the fixed state pension. This is because the state pension is not means-tested, meaning the money you receive is not subject to your wealth and most working people qualify. However, taking out an equity release scheme can affect your entitlement to a number of means-tested benefits, including Universal Credit and Pension Credits. 

Nobody with savings above £16,000 can access Universal Credit, and Pension Credit payments are reduced by £1 for every £500 you have saved above £10,000. If you are no longer entitled to receive Pension Credits then you can lose access to other benefits, such as a council tax reduction. 

Do you pay tax on equity release?

Equity release might feel like money for selling part of your home in the future – because there do not have to be any monthly repayments – but it is not subject to Capital Gains Tax (CGT) or income tax. Equity release is always a type of loan, and loans are never taxed in the UK

Be aware that releasing equity can have positive or negative implications on inheritance tax (IHT), which should be discussed with your adviser. 

Can you get equity release with voluntary repayments? (Quick recap!)

You can find lifetime mortgages that allow the homeowner to make voluntary interest repayments of their choosing. Sometimes these are called repayment lifetime mortgages. The benefit of this is that you mitigate how fast the debt grows and ensure more of your estate is passed to loved ones when you die. It may or may not be worthwhile depending on your circumstances, and it is best discussed with an equity release adviser. 

Learn more about equity release plans in the UK!

If you want to learn more about equity release with or without a repayment option, you can find plenty more guides and articles at MoneyNerd. Discover clear answers to the most asked and complex equity release questions. We don’t use confusing finance terms or jargon to ensure all readers have the knowledge to make informed decisions.