Equity Release No Early Repayment Charges – Is It Possible?

Equity release no early repayment charges – do they exist? 

We take a look at the possibility of taking out a lifetime mortgage or home reversion scheme without being subject to early repayment charges. You might be surprised at what’s on offer – read on for details. 

What is equity release?

Equity release is a way for senior homeowners to borrow against their residential property and not have to make monthly repayments. 

The debt grows each month and is only repaid when they pass away or move into long-term residential care. At this stage, the lender can sell the property to recover the money owed. 

There are two equity release loans, namely a home reversion scheme and the more popular lifetime mortgage. Learn the details of how they work in our MoneyNerd equity release master guide.  

Can you repay an equity release loan early?

It’s possible to repay a lifetime mortgage early. 

Lifetime mortgages – as their name suggests – are intended to last for the remainder of the homeowner’s lifetime, or until they have to move into a care home. 

But for different reasons, the homeowner may wish to repay the debt and exit the credit agreement early. 

It’s possible to clear the lifetime mortgage early but the homeowner could be subject to early repayment charges. 

You can also pay off the interest on a lifetime mortgage each month through voluntary interest repayments. 

What is an early repayment charge?

An early repayment charge is a fee you might have to pay if you want to pay off some or all of a loan early. They are usually written into credit agreements on mortgages and secured loans, but they can also be present in unsecured loan agreements as well. 

Equity release companies commonly add early repayment charges to lifetime mortgages and home reversion plans. 

You might see them abbreviated as an ERC, but this can be slightly confusing in the equity release industry because the Equity Release Council can also go by the ERC abbreviation. 

What is a typical amount for an early repayment charge?

Standard early repayment charges will range from 1% to 5% on the outstanding debt. 

For example, if you took out a loan of £20,000 and paid off £10,000 before deciding to clear the loan in full early, you might have to pay an early repayment charge between 1% and 5% of the outstanding £10,000 loan – not on the initial loan amount of £20,000.

This means the borrower might have to pay between £100 and £500 to pay off their £10,000 loan earlier than agreed. 

What are the early repayment charges on equity release?

Early repayment charges on equity release plans aren’t as straightforward as many other loans. Lenders may use different early repayment charge structures, but most fit into a fixed rate or variable rate structure. 

Variable early repayment charges are usually based on gilt yields, which are a type of British Government bond. Because they are variable, there is a chance you could pay £0 in early repayment fees, but you might also be charged 25%+ depending on how the gilt yield is performing. Aviva is one company that uses a variable structure like this. 

Other equity release plans might use a fixed repayment charge structure, which allows you to know how much you would have to pay to exit the agreement from the outset. It’s normal for fixed early repayment structures to include a period of higher fees, which gradually lower as time goes on. 

Your equity release adviser should discuss the equity release companies to avoid  – based on your requirements – if you wish to pay some of the debt off early. 

Equity release no early repayment charges – possible?

Yes, it’s possible to pay no early repayment charges when paying off a lifetime mortgage or home reversion plan. 

You could pay no early repayment fees when you either:

1. Pay off a variable early repayment charge when the relevant gilt is performing at the same level as when you took out the equity release plan.
2. Or, when you have a fixed early repayment structure and have held the equity release plan for a duration that no longer applies a charge. For example, Canada Life doesn’t charge early repayment fees after eight years. 

Can early repayment charges be waived?

A downsizing clause could waive your equity release early repayment fees when you are moving to a new property that is of lesser value.

Lenders will usually allow homeowners to move home and take their existing equity release plan with them to the new property, meaning they won’t need to pay off the loan (and fees!) when they move. 

The new property must be of the same or higher value to do this, which can cause a problem if you want to downsize to a property of lesser value. 

However, an equity release plan can include a downsizing clause which allows you to downsize to a property of lesser value after holding the loan for so many years. 

This clause enables the homeowner to pay off a percentage of the loan to cover the shortfall in property value – but no early repayment charges can be applied!

Related ERC questions

Can I get a mortgage without an ERC?

Some lenders might offer mortgages without early repayment charges. Or they may allow you to overpay a certain amount each year without being hit by early repayment fees. 

How can I avoid paying the ERC when I remortgage or move house?

There is no way to avoid early repayment charges that you’ve already agreed to. However, the savings you could make by switching to a lower interest rate might outweigh the early repayment costs. 

How do I avoid an early repayment fee?

The only way to avoid early repayment charges you’ve already agreed to is to not repay the loan early. Or to pay back the amount allowed without incurring the fee each year.