Equity Release with Repayment Option – What You Should Know

Are you trying to understand equity release with a repayment option? This can be a tricky topic, but we’re here to make it simple for you.

This article explains repayment features and costs to discuss with a qualified equity-release adviser.

In this article, we’ll cover:

• What equity release is and how it works.
• The risks tied to your home’s equity.
• How and when equity release needs to be paid back.
• The realistic quotes for equity release.
• The catches you should be aware of with equity release.

The Centre for Ageing Better found a million UK homes need improvements for comfortable living, with a third housing someone over 55.¹ If you’re in that age bracket and contemplating equity release, understanding all its details becomes particularly crucial.

We know that equity release can seem tricky, which is why we’ve put together this guide to help you make the best decisions for your future. Let’s start this journey together.

Does equity release have to be paid back?

A lifetime mortgage is a loan secured on your home; you retain ownership. Interest that is not paid is added to the balance. The loan is usually settled when the last borrower dies or moves permanently into care, subject to the contract. Required or optional repayments vary by product. A home reversion plan is a sale of part or all of your home, usually below open-market value, in return for money and the right to remain under the plan’s occupancy terms. It is not a loan. The provider receives its agreed share when the home is sold.

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.

For a plan meeting the relevant Equity Release Council standards, the right to remain depends on keeping the property as your main residence and meeting the contract terms. A no-negative-equity guarantee limits repayment to the net sale proceeds when its conditions are met; it does not stop the balance growing or make the product risk-free.

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

Equity Release Do’s and Dont’s

Before we explore the details of repayment, it’s essential to have a solid understanding of the do’s and don’ts of equity release. This ensures you can make informed decisions and navigate the process confidently.

To make things easier, I’ve put together a table outlining key guidelines to help you along the way. If you want to learn more about equity release, be sure to read our complete guide.

Equity Release – DO…	Equity Release – DON’T…
DO Discuss your purpose, affordability, alternatives and future needs with a qualified equity-release adviser. Borrowing to repay debts or give money away can reduce your financial security.	DON’T proceed under pressure or without understanding estate, benefit, care-funding, interest and fee consequences.
DO Seek professional advice from professionals who specialize in equity release.	DON’T Rush into a decision. Take your time, you are in control on this.
DO Understand the difference between lifetime mortgages and home reversion plans – and which is best for you.	DON’T Use equity release without fully understanding the terms.
DO Check for flexibility – look for plans that let you be flexible, like making partial repayments.	DON’T Forget to look at alternative options for raising funds.

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

Some lifetime mortgages permit voluntary payments; others require interest payments for an agreed period. Check the exact product rather than relying on the label repayment lifetime mortgage.

Voluntary payment limits, frequency and charge-free allowances are set by the provider. Required payments must be maintained under the contract.

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

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

How much interest do you pay back?

Borrowing amount and loan-to-value can affect pricing, but rates do not automatically rise with every larger advance.

Rates change and depend on the product and your circumstances. Obtain a current personalised illustration and compare the APRC, fees, repayment options and total projected cost; this article does not quote a live market-leading rate.

Illustration only: £65,000 at 6.4% interest compounded annually without repayments would grow to about £137,000 after 12 years, excluding fees.

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. 

Whether to make voluntary payments depends on affordability, other debts, cash reserves, future plans and estate priorities, not only whether beneficiaries need money.

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

Before changing voluntary repayments, obtain advice on your future needs, the projected balance and the contract. A no-negative-equity guarantee does not make interest payments automatically pointless and does not remove required payments.

For a plan meeting the relevant Equity Release Council standards, the right to remain depends on keeping the property as your main residence and meeting the contract terms. A no-negative-equity guarantee limits repayment to the net sale proceeds when its conditions are met; it does not stop the balance growing or make the product risk-free.

Do not stop required payments based on a current valuation or assumed guarantee. Discuss any voluntary-payment decision with an adviser; future property values, contract terms and other objectives matter.

Can you repay it early?

A lifetime mortgage may be repaid early under its terms. Home reversion is a sale and has different contractual arrangements for ending the plan.

Early-repayment charges may apply, but products can include charge-free allowances, expiry dates or exemptions. See related guidance.

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Equity release enquiry: Continue to the equity release enquiry

Advertisement. In partnership with Age Partnership, which advises on lifetime mortgages. MoneyNerd introduces enquiries and may receive a referral fee. Equity release can reduce your estate and affect means-tested benefits and future care funding. Fees may apply and interest added to a lifetime mortgage increases the amount owed. Specialist financial and independent legal advice are required before proceeding.

What are the early repayment charges?

Charges depend on the agreement, amount, timing and any exemption. Obtain a current redemption statement.

Some charges are substantial, but they are not universally unaffordable. The actual schedule and any exemption must be assessed.

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.

Downsizing protection may waive charges when its conditions are met. It is product-specific and may have waiting periods or other restrictions.

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 it off?

The estate’s personal representatives should notify the lender and confirm repayment deadlines. Interest normally continues until the loan is repaid.

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.

An adviser may also help find a provider and submit an application. Equity release is a long-term commitment that can be costly to change or repay, so compare advice scope, fees and alternatives before proceeding.

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 it affect my entitlement to a state pension?

The State Pension is not means-tested, although amounts differ between people. Released capital may affect means-tested support.

Universal Credit normally has a £16,000 upper capital limit, subject to disregards. Pension Credit generally counts £1 weekly income per £500 or part above £10,000. Obtain advice on the full assessment and linked benefits.

Do you pay tax on equity release?

A lifetime-mortgage advance is borrowed capital rather than taxable income. Home reversion is a property sale, and later investment income, gains or gifts can have separate tax consequences.

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

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. 

References

1. Legal & General – Equity Release