Equity Release Partial Repayments
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What are equity release partial repayments, and what’s all the surrounding buzz?
The Equity Release Council made an exciting announcement on 31 January 2022 that’s left the industry buzzing.
Did you think equity release is something that you’re tied into for life?
Well, guaranteed partial repayments may be a complete game-changer.
Here’s the exciting news that’s changed the course of the equity release industry’s future in Apr 2022.
The Equity Release Council’s Announcement
On 31 January 2022, the Equity Release Council released a report stating that, in the near future,
Lenders are required to offer borrowers the opportunity to make annual partial repayments on all lifetime mortgage plans.
The news is welcomed by prospective borrowers on the 30th anniversary of the Equity Release Council1, as partial repayments could be the key to mitigating high equity release costs.
As of 28 March 2022, all Lifetime Mortgage lenders under the guidance of the Council will need to offer penalty-free partial repayments to their borrowers.
Is Interest Charged on All Equity Release Types?
No, homeowners will only pay interest on the most popular type of equity release, a lifetime mortgage.
With a home reversion scheme, the lender will purchase your property below market value and benefit from the full value when your property is sold.
The Terms & Conditions of Equity Release & Partial Repayments
- Borrowers can pay off up to 10% of the loan annually, penalty-free.
- Some leading lenders are implementing up to 40% repayments annually, sometimes dependent on how long the loan has been in place.
- Homeowners can also pay back the monthly interest.
- You can stop and start making payments at any time.
- There’s still no affordability checks as the loan is secured against your estate’s value.
What Are the Benefits of Partial Repayments?
The greatest benefit of partial repayments and equity release is that you can drastically reduce the overall value of your loan.
Further benefits include:
- You’ll increase the overall value of your inheritance.
- You can repay your equity release loan within 10 years.
- You can stop the interest from compounding.
- You won’t risk foreclosure2 if you can no longer afford the payments.
- Your family can still keep your beloved family home if you pass away once the loan is repaid.
- You may have more equity in your home for future use, should you opt for regular partial repayments.
Can I Repay My Equity Release Loan in One Transaction?
You can repay your equity release loan in one transaction, but you may incur early repayment charges.
These can be anything from 5% of the total loan value and can reduce to 3% after 6 to 8 years.
Furthermore, many lenders will remove early repayment charges altogether when 8 years have passed.
Finding the Means to Repay Your Equity Release Loan in Retirement
Without a stable income, paying off an equity release loan may be a challenge for many retirees, especially because it impacts your access to means-tested benefits.
However, there are ways to pay off your loan, or at least the monthly interest.
Here’s some inspiration:
- Reduce costs – After all, the monthly interest costs are likely as low as what you pay for a TV license.
- Sell assets – You may want to consider selling some of your unused furniture to pay off some of the loan.
- Use the loan itself – It’s possible to use some of the equity you unlock to repay the monthly interest.
- Use your private pension – You could add the monthly repayments to your budget.
Before using any of the above means to repay your equity release loan, you MUST consult the financial adviser that helped you unlock equity in the first place.
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Why Are Guaranteed Partial Repayments a Game Changer?
Guaranteed partial repayments on all lifetime mortgage products is a gamechanger for the industry as homeowners now have the opportunity to repay their loan within 10 years, rebuilding the equity in their property.
Partial repayments will also mean that homeowners can drastically reduce the cost of their equity release loan.
You see, lifetime mortgages work with compound interest. But, if you’re paying off the monthly interest, there’s nothing to compound.
Here’s an example:
If you unlock £50,000 through a lifetime mortgage and your monthly interest is 3.5%, you’ll pay £145.83 each month to avoid compound interest.
If you’re also paying £5,000 in annual capital (10% of the loan), you’ll only pay a total of £67,499.60 on the £50,000 loan.
However, the picture is vastly different if you don’t repay your interest.
The interest will compound over time, and you’ll end up paying much more for your loan.
In the same 10 years, your loan and compound interest would amount to £70,917, and that’s just the beginning.
The interest will continue to compound until you pass away or enter long-term care.
In a nutshell, guaranteed partial repayments can save homeowners a fortune.
You should seriously consider paying back at least the monthly interest if you have the means to do so.
Are Guaranteed Partial Repayments Only Available for New Equity Release Borrowers?
Yes, guaranteed partial repayments are only available for new lifetime mortgage borrowers, unlock plans from 31 March 2022.
Some existing plans already have these features, while others may not be as lucky.
Should I Review My Lifetime Mortgage Plan to Gain Access to Partial Repayments?
Yes, it’s a great idea to review your lifetime mortgage plan to gain access to partial repayments.
If your current plan is sans this feature, you may want to consider switching plans.
Just be sure that your new plan comes with competitive interest rates.
You see, interest rates were at an all-time low in March 2021, so if you unlocked a plan back then, you may not find equivalent interest rates in Apr 2022.
Your best bet is to chat with your financial adviser, who can help you calculate the outcome of your various options.
How Long Will It Take To Pay Off My Equity Release Mortgage?
If you religiously make monthly interest repayments and pay 10% of the loan annually, you could repay your equity release loan within 10 years.
So, if you unlock cash at 55, you could fully replenish the equity in your home at 65, and even opt for a new loan if you desire.
And with some lenders offering up to 40% in repayments, that’s more like 3 years.
Is Equity Release Safe?
Yes, equity release is safe. All your legitimate plans are regulated by the Equity Release Council and overseen by the Financial Conduct Authority.
Is There an Age Limit for Equity Release?
It depends on the lender you select. Some lenders only offer equity release to homeowners younger than 85 or 95, while others have no age limit at all.
What Are the Types of Equity Release?
The 2 main types of equity release are a lifetime mortgage and a home reversion scheme. With a lifetime mortgage, you retain full ownership of your property. But, you’ll sell a portion of your property with a home reversion scheme.
As we emerge from a global pandemic3, the equity release industry appears to be flourishing.
Now, homeowners over 55 have more options to help them financially during a tough economic time.
The guarantee of partial repayments means homeowners have the opportunity to repay their lifetime mortgage and save tons of money.
Plus, if they have the means to, they can keep their estate intact.
The new regulations around equity release partial repayments are great news for consumers!
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