There are many different types of equity release available, and they can be a great way, if you are over the age of 55, to unlock some of the value from your home. But will providers accept repayments of interest and capital?
That is a question that many people ask themselves before taking out an equity release agreement.
Luckily for you, we are here to guide you through this lifelong agreement, and unpack all there is to know about equity release capital and interest repayments.
Equity Release Market: Some Innovation Needed
The idea of equity release can be daunting for many people. It is a complex type of financial product, and there are many different types that you need to consider before taking out an agreement.
One thing that’s often mentioned in the media as being something consumers would like to see more innovation in is interest and capital repayments – will providers accept them?
Interestingly, some providers have already started accepting these payments. The best way to find out whether or not your provider accepts this repayment option is simply by asking them.
If it turns out they do allow interest repayments, then what does this mean? Basically, you will help decrease the amount of compound interest, and how much your family will owe when you pass away or move into long-term care.
In some cases, providers who accept these payments will also offer incentives to borrowers if they make repayments. For example, Saffron’s equity release provider offers £250 every year to their customers when they’re making more than 12 interest-only monthly payments towards their mortgage during that period.
Halifax Tried and Failed
Halifax tried to accept repayments of interest and capital but failed. Banks have a duty under the Financial Services and Markets Act 20001 to take reasonable steps to manage risks, including discharging debtors’ obligations.
This includes those arising from annuities2 with significant equity release features.
However, Halifax said that because they are not regulated as an insurance company, it would be difficult for them to offer such products unless they dealt with all aspects of their customers’ mortgage lending needs in-house (i.e., took on responsibility for the loan).
This is problematic because, without this transferral of risk within a single institution, many borrowers become trapped into never fully paying off their mortgages or moving away from home when they retire, which may make it difficult for them to meet the needs of their children and grandchildren.
It also creates problems in competition because Halifax is one of only a few providers able to offer financial products with equity release features.
Therefore, if they do not enter this market, more people may begin looking into having these types of mortgages arranged through banks outside the UK, which could encourage those lenders to provide these products on less favourable terms than what would be offered by competitors in Britain.
The British Bankers’ Association (BBA)3 has been lobbying the government about this issue but does not want to see any change that might undermine its members’ ability to compete effectively or put customers at risk by creating an unstable regulatory environment between firms operating domestically and internationally.
Changes Have Started
The Financial Conduct Authority (FCA4) has already started to make some changes. They have proposed a “sandbox” for firms that want to offer annuities with equity release features in which they will be given time-limited regulatory permission, albeit under close supervision.
This is intended as an opportunity for the FCA and other regulators to learn from any lessons before these products are offered more widely.
Some people might think this means we’ll see Halifax or other providers of equity release services entering the market. Still, it’s too soon to tell what impact this will have on them because there are many hoops they need to jump through first before complying with new rules governing their operation – not least among those requirements is finding funding for the repayments of interest and capital.
In other words, it’s not likely that we’ll see any changes soon. Still, regulators are committed to finding a way through this issue. People who have mortgages with equity release features can start making repayments if they want without being at risk of foreclosure from their lender.
Will Equity Release Providers Accept Repayments of Interest and/or Capital?
As a prospective equity release customer, one of the most common questions you might have is whether providers will accept interest and/or capital repayments.
The answer to that question depends on which type of provider you are considering and what terms they offer for their deals. Some providers are more flexible than others about how much repayment can be made each year, while some may only allow repayment in whole number increments like £1000 or $2000 at any time.
It’s also worth checking if there are any other fees, such as arrangements or early repayment penalties, to make sure they’re not going to cost too much more than your current deal.
Some lenders do allow repayment at any time, while some only let customers repay monthly or annually; check with them before making this decision, so you know exactly what options you have available!
However, take note that you are not obligated to make any repayments towards your equity release. The loan will be repaid through the sale of your home when you die or move into permanent care.
Why You Should Consider Repaying Interest and/or Capital
While you are not obligated to do so, there are definitely reasons why it’s a great idea to make capital or interest repayments. Here they are:
- Equity release interest is rolling-interest5, meaning that is compounded. While interest rates are usually fixed, compound interest means that the amount paid will continuously increase. By making interest repayments, you are halting the funds from accumulating.
- By making interest and/or capital repayments, it will mean that there is less owed on your equity release loan when you pass away or move into permanent care. If housing prices have risen, there could be more money available for your family to inherit.
- If you pay back some of your loan, there might be more equity available to release at a later stage.
How to Repay Interest and/or Capital
Different providers will have different ways of accepting repayments; some may be more flexible than others about how much repayment can be made each year. Some may only allow repayment in whole number increments like £1000 or $2000 at any time.
In general, the best choice is to make regular contributions towards paying down debt rather than rely heavily on a lump sum payment, unless your life circumstances have drastically shifted, causing you to have the means to pay back the loan.
If other debts need paying off before equity release, then it might not be the best idea to repay your equity release plan.
While there is no obligation, Equity release providers may be willing to accept repayments of interest and capital. This could potentially benefit your future generations. Just be sure to look out for early repayment penalties as equity release is intended to be a lifelong commitment.
The best way to find out how your provider feels about this kind of repayment would be to ask them directly or speak to your financial planner. You should ask about early repayment and fully understand what’s equity release, before taking out a plan.