Capital & Interest Repayments in 2022
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How Much Can You Release? 👇
Equity release is as flexible as ever in 2022, and we’ve got some exciting news.
While compound interest can cost you fortunes,
We’ve got some tips and tricks to save big through capital and interest repayments on your equity release plan.
Through this article, you’ll discover:
- The rules around making capital repayments on your equity release plan.
- Paying back monthly interest on your equity release.
- How to find the most flexible equity release lender for your needs.
At SovereignBoss, we’re always looking for ways to help our valued readers get the best deals on all their retirement products.
Through analysing equity release trends and interest, we realised that there are ways to drastically reduce your equity release plan’s overall costs.
Here’s what we found.
What Is Equity Release?
Equity release is a financial product in Briton that older homeowners use to access the capital in their property, while still living there.
If you’re over 55 and own your home outright or have a small mortgage left, you may qualify for an equity release loan.
The money can be released in a lump sum, into a cash facility1 for drawdown purposes,
As a combination of the 2, or sent to your account as a monthly salary.
Are There Different Types of Equity Release?
There are 2 main categories for equity release plans, lifetime mortgages and home reversion schemes.
What’s a Lifetime Mortgage?
A lifetime mortgage is an umbrella term for an equity release that allows you to unlock the money tied into your home, while retaining 100% ownership of the property.
These plans work with fixed compound interest that tallies up annually, and is then added to the total loan amount.
What’s a Home Reversion Scheme?
A home reversion scheme differs from a lifetime mortgage in that there is no compound interest to worry about.
With a home reversion scheme, you agree to sell all or a portion of your home to a lender below the property’s market value2.
In exchange, you can live in your home, without paying rent, for the rest of your life.
When the last homeowner dies or goes to long-term care, the home is sold, and the lender collects their full share of the property at market value.
A home reversion scheme is intended to last for life and is vastly less flexible than a lifetime mortgage.
When Will I Pay Back My Equity Release Plan?
Your equity release loan is usually repaid from the sale of your home when you die or enter long-term care.
Before then, no interest or capital repayments are required.
However, you can make various payments towards your plan, to reduce the total capital owed at the end of the loan term.
Tips to Reducing the Costs of Your Equity Release Lifetime Mortgage
While equity release is incredibly convenient, it can be a costly exercise.
While you may not directly feel the costs, it does drastically reduce the value of your estate.
Here are some tips:
- Find a lender that allows you to make regular capital repayments. While you’re still essentially paying for your plan this way, it does reduce the overall loan amount.
- Choose an interest-only lifetime mortgage or one that allows you to voluntary pay back the monthly interest when you have the means to do so. Since compound interest is interest on interest, paying back all or some of the interest can save you many thousands.
- Bonus Tip: Many equity release plans these days have flexible options to attract clients in a growing market. While equity release will generally cost you between £1,500 and £3,000, you can reduce some of those costs with free services on offer. These may include a free valuation, free advice, or no completion fee.
Equity Release Capital Repayments
These days, lenders allow you to pay back up to 10% to 40% (lender dependent) of the capital annually, with payments as little as £25 monthly.
If you come into money and have the means to do so, you could theoretically pay back your equity release loan within 4 to 10 years.
Not only will you maintain 100% ownership of your home with a lifetime mortgage, but by paying it off, you’ll restore the full value of your home. Of course, this depends on how long you live.
Even if you can’t fully repay the loan, even the smallest capital payments can make a big difference when selling your property at the end of the loan.
The more you pay off in your lifetime, the more inheritance you’ll leave for your heirs.
However, there are no guarantees.
You could live a long life, meaning that the compound interest accumulates significantly, putting your loan into negative equity.
Luckily, the Equity Release Council3 has ruled that any shortfall beyond the home’s final sale be written off.
Equity Release Interest Repayments
While paying back the interest, especially in larger quantities, can be a significant way to reduce your lifetime mortgage equity release debt, it’s the compound interest that costs the most.
Compound interest (or compounding interest) is the interest on your equity release loan,
That is calculated by taking into account both the original principal and the previous period’s accumulated interest.
The idea of compounding interest is thought to have originated in Italy in the 17th century, and it can be likened to “interest on interest,” causing a sum to grow significantly.
Luckily, the interest-only lifetime mortgage was invented in recent years.
What’s fantastic about this plan is that while monthly interest is expected, you can switch plans at any time.
There is no risk of foreclosure if you no longer can afford the payments.
In addition, some lenders allow you to make voluntary interest repayments on your lifetime mortgage whenever you wish to do so.
Where Can I Find an Interest-Only Lifetime Mortgage?
You can find an interest-only lifetime mortgage by contacting some of the leading equity release lenders in the UK, who are members of the Equity Release Council.
Lenders currently offering interest-only lifetime mortgages:
- Canada Life
- One Family
- Pure Retirement
- Standard Life
Do All Lenders Allow You to Repay the Interest & Capital on Your Equity Release Plan?
All equity release companies allow you to pay back up to 10% or more of your loan annually.
If you want to benefit from paying back some of your equity release loan or interest, chat this through with your equity release adviser so they can find a suitable plan.
Furthermore, no matter what deals you’re offered, never opt for an equity release lender that’s not a member of the Equity Release Council.
Non-members won’t have essential safeguards in their plans.
Can I Pay Back My Equity Release Plan Early
Yes, you can pay back your equity release loan early. However, you may incur early repayment charges.
This is often 5% for the first 5 years, 3% for the next 5, and nothing after that. However, charges will differ from one lender to the next.
What's the Best Way to Repay Equity Release Providers?
It is important to make regular contributions towards paying down debt rather than rely heavily on a lump sum payment; it’s best not to leave all your money with one lender if possible.
What Are Some Reasons for Repaying Interest and/or Capital?
One of the benefits of repaying interest and/or capital is that this can accelerate how quickly loans get repaid; by paying off more than just what’s needed each month (when possible).
You will reduce how long it takes until your house has been fully released from all debt so there will be less risk when it comes time for retirement living.
What's the Best Way to Make Payments?
Most providers will have different ways of accepting repayments; some might be more flexible about how much repayment can be made each year, while others may only allow repayment in whole number increments like £1000 at any time.
How to Calculate Interest for Repayments?
Different providers have different interest rates, so it’s important to make sure that you know what the annual rate is and divide this by 12 to calculate monthly.
If you want to unlock the equity tied into your property and pay back some of the loan or interest, you can drastically reduce the final settlement.
However, what’s great about equity release is that no payments are required, and you never have to worry about foreclosure.
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Editorial Note: This content has been independently collected by the SovereignBoss advisor team and is offered on a non-advised basis. Sovereignboss may earn a commission on sales made from partner links on this page, but that doesn’t affect our editors’ opinions or evaluations. Learn more about our editorial guidelines.