Releasing equity from your home is a big decision and you’re likely to have lots of questions. Questions like: How do you pay back equity release? And can you pay off equity release early?

Equity release, also known as a lifetime mortgage, allows homeowners aged 55 and over to access some of the equity tied up in their home without having to make any repayments until they pass away or move into long-term care.

While there is no obligation to make any repayments, homeowners want flexibility and the option to repay early if they wish. 

In this article we’ll explain:

  • How you pay back equity release
  • The benefits of repaying early
  • Key factors to consider

Paying back equity release

Over the last 5 to 10 years the product options available to borrowers have improved significantly. For example, in March 2022 the Equity Release Council, which is the industry body for the UK equity release sector, introduced a new compulsory feature for all lifetime mortgages that are approved by the Council: The option for borrowers to make voluntary penalty-free partial repayments.

This new requirement transformed the equity release sector and further enhanced the appeal of equity release for older homeowners.

In 2022 alone, 90,000 equity release customers made voluntary partial repayments and reduced their loans by a combined £102 million. Not only did they reduce their loans, but they also reduced the impact of compound interest and saved a further £116 million in future interest costs over the next 20 years. 

How can you pay back equity release?

If you choose not to make any repayments your loan will be repaid when you pass away or go into long-term care and your house is sold. The proceeds from the sale will be used to repay the lender what you owe which will be the capital you borrowed plus the interest accrued over the loan term. If there is anything left over, that will form part of your estate and be left to your beneficiaries.

However, if you wish to make repayments you have the option to pay some of the interest, all of the interest, or more than the interest. 

If you pay all of the interest, at the end of the equity release plan you will owe only the capital that you initially borrowed. 

If you pay more than the interest you will be able to chip away at the principal loan amount and you’ll owe less than what you initially borrowed.

Equity release early repayment charges

Just like a regular mortgage, if you repay the loan early and in full there may be an early repayment charge. All plans that are approved by the Equity Release Council will allow you to make voluntary penalty-free partial repayments up to a certain amount. Most plans allow you to repay up to 10% of your loan amount each year and some plans allow you to repay as much as 40% of the loan amount without an early repayment charge.

Before you take out a lifetime mortgage, check how much you can repay without penalty and how the early repayment charge is calculated to find a plan that is suitable for your requirements. But be mindful that, in some cases, you may be liable to pay an early repayment penalty.

The benefits of repaying equity release early

If you can afford to make repayments, you’ll benefit in several ways:

  • Reduce the impact of compound interest over the duration of the loan
  • Preserve the value of your estate so you can pass on more wealth to your loved ones
  • Your property is likely to increase in value over the term of your equity release plan, by making repayments you can better capitalise on that appreciation

It’s important to remember that you are under no obligation to repay anything at all until your property is sold. So if your financial circumstances change and you are no longer able to make repayments you can stop at any time. 

To learn more about the costs involved in taking out a lifetime mortgage take a look at our blog article: How to Reduce the Costs of Equity Release

To find out more about how equity release works and how much you could borrow, get in touch to speak to a qualified Later Life Mortgage Specialist.