New Repayment Models Reshape the Equity Release Landscape

If you take out an equity release loan, you do not have to repay a penny until after you pass away or move into a care home.

However, you are also able to make voluntary repayments, which can end up saving you money in the long run.

This article explains how voluntary payments work and why they might be a good option if you want to keep your compound interest at bay and also reduce your overall loan amount.

In fact, according to a latest report from the Equity Release Council, equity release customers will save almost £300 million in borrowing costs over the next 20 years if they take advantage of voluntary and early repayments on their equity release loans.

How do voluntary repayments work?

Equity release works by allowing you to gain access to the money that has built up in your home.

You do not have to repay this loan until after you pass away but will be charged interest on your loan which will compound each month and each year. This means that your final and overall loan amount might be more than you think.

The interest you are charged on your loan will roll up and compound, which is why a lot of people choose to pay off some of the loan they owe early, whilst they are still alive. This will keep your overall loan amount and the amount of interest you are charged at bay.

However, there’s a catch. Most lenders will charge their clients an early repayment fee for paying off parts of their loan. However, the right to make penalty-free repayments is one of the five standards set by the Equity Release Council, meaning that more and more lenders are now allowing their clients to pay off a set amount early if they choose to do so.

This means that most equity release lenders will allow their clients the chance to repay between 8% – 15% of their loan without being charged any early repayment fees.

What are the pros and cons of choosing equity release?

There are numerous pros and cons associated with equity release. For most people, the biggest advantage is that you get to gain access to a large amount of the money that is tied up in your home.

You get to spend this money on whatever you want, with many people opting to spend the money they receive on home improvements, their loved ones or even a better lifestyle as they retire.

Lots of people who opt for equity release are able to gift the money they receive to their grandchildren, whether that is to put the money down as a house deposit or to help them pay for further education.

You also do not have to repay the money until after you pass away or move into a care home. Once you do so, your house will be sold and the proceeds from the sale of the home will pay off the loan, hopefully in full.

If they do not, then the lender will be responsible for paying any of the shortfall. This could be tens of thousands of pounds, which the lender will have to pay off. This is called the no negative equity guarantee.

By opting for equity release scheme in London, you also get to remain living in your home for as long as you want to. As long as you stick to the terms and conditions of your loan, no lender has the right to ask you to leave. This means that you can relax in the comfort of your own home for as long as you want to.

However, there are also some downsides associated with equity release, too. For example, you will be charged interest on your loan. This interest will compound over time, and will increase your overall loan amount significantly. This means that for as long as you live, your loan will be increasing.

By opting for equity release, your loved ones will likely receive less inheritance. This is because the proceeds from the sale of the home will pay off the loan, rather than directly to your loved ones as inheritance.

This is why it is important to let your next of kin(s) and loved ones know about your equity release plans, so that it does not come as a shock to them after you pass away.

How can early repayments help me?

Early repayments can save you money in the long run. By repaying some of the loan whilst you are still alive, then you will reduce your overall loan amount and therefore the amount of interest you will be charged year on year.

By doing so, there might be some money left over from the sale of your house after you pay off the equity release loan. This money would then be able to go to your loved ones as inheritance as would be free for them to spend on whatever they want to.

How much could you save by making voluntary repayments?

The Equity Release Council has carried out a study that shows just how much money you can save by either making early repayments or by opting for a drawdown plan.

The Equity Release Council have found that by opting for a drawdown plan of £60,000 and then making ad hoc early repayments, then you could significantly reduce the amount of interest you have to pay.

For example, if you made regular repayments of just £100 a month, then you would save over £17,000 in interest over 10 years on a £60,000 loan. This would amount to a staggering saving of £50,000 over 20 years. Likewise, if you were to repay £200 a month in early repayment amounts, then you would save a staggering £34,000 within 10 years and £99,000 within 20 years. Please note that this is presuming an interest rate of 6.57%.

As you can see, early repayments can certainly be worth it if you are willing to make monthly repayments.

How to release equity from your home

If you opt for equity release, then you will first need to speak to a qualified equity release adviser who will talk you through all of your available options. Your equity release adviser will never put any pressure on you to release equity from your home, as they are only ever there to provide you with all of the information you need to make an informed decision.

Your equity release adviser should be fully qualified, with either a CeRER (Certificate in regulated Equity Release) or a ERMAPC (Equity Release Mortgage Advice and Practice Certificate).

Once your advisor has presented you with all of your available options and equity release products, then you will be recommended to a number of lenders. It is important that you fully understand the terms and conditions of your loan and features of your equity release plan.

Meanwhile, you will need to have your house valued. This means that someone will come to your home to examine the location, the condition and the general estimated value of the property.

Once you have chosen a lender, your equity release adviser will then help you to apply for the equity release loan. At this point, you will then hire an equity release solicitor, who will draft up a contract for you as well as your key illustration.

This will clearly outline exactly how much you will be getting, your fixed interest rate and how much you will owe year on year. With a fixed interest rate, this is easy for your lender and solicitor to work out.

Speak to Equity Release Warehouse

If you are interested in releasing equity from your home, or would like to make small early repayments on your pre-existing equity release loan, then you should speak to a member of the Equity Release Warehouse team.

Our team of advisors will never force you to release equity from your home. Instead, they will provide you with all of the information you need to make a practical and informed decision that is right for you and for your family.