One of the major benefits of equity release and retirement interest-only (RIO) mortgages is that they don’t require you to pay back the capital you’ve borrowed, although with a RIO mortgage you will pay off the interest you owe monthly.
Both these financial products are aimed at borrowers in their 50s and 60s approaching retirement, who have a decent chunk of equity in their property. There are several differences between equity release and RIO mortgages, but one similarity they have is that the capital sum borrowed only has to be returned to the lender usually when you die or move into long-term care and the property is sold. Read more in our article What’s the difference between a lifetime mortgage and a retirement interest-only mortgage?
However, circumstances can change, so you may decide that you want to repay some or all of your debt early. Here’s everything you need to know if you’ve taken out an equity release loan or retirement interest-only mortgage and want to make early repayments.
How equity release and retirement interest-only mortgages work
Equity release can provide you with a lump sum, regular payments or a combination of both by releasing some of the equity tied up in your property. The interest owed builds up, and is typically repaid when you die or move into long-term care. Read more in our article Equity release – what is it and how does it work?
With retirement interest-only mortgages, you make interest-only repayments indefinitely, so there isn’t a particular date when the loan must be repaid. The mortgage capital is generally only repaid when you pass away or move out and sell your home. This type of mortgage is aimed at borrowers in their 50s and beyond, who might find it difficult to qualify for a standard mortgage because their income has reduced in retirement. Read more in our article How retirement interest-only mortgages work.
You can find out more about other mortgage options which might be available to you in our article Mortgages if you’re over 50: what you need to know.
Why might you want to repay your equity release plan or RIO mortgage early?
There are a number of reasons why you might decide you want to repay an equity release or RIO mortgage plan early.
For example, by repaying some or all of your debt during your lifetime, you can increase the amount you can leave to beneficiaries when you die.
Repaying some of your equity release plan early also reduces the impact of compound interest, which can see your debt rack up into a hefty sum over time. As you’re not paying off either the loan or the interest owed each month, the amount you owe increases at a faster pace each year than it would if you were making repayments, as you’re paying interest on the interest you’ve already been charged.
You might also find that your financial circumstances change over time. For example, you may receive an inheritance or work bonus that means you have the spare money to repay debts, such as your mortgage or equity release loan.
Life plans can also change. For example, you may want to downsize and find you cannot take your equity release plan with you, if your lender’s terms won’t allow it. Or you may not want to transfer your debt to a new property, and plan to pay it off before you move.
Can you repay your equity release loan early?
Equity release providers are increasingly offering flexible products, and in March 2022 the Equity Release Council, the trade body for the equity release sector, said that all new lifetime mortgage products offered by its members must include the facility to make penalty-free partial repayments, subject to lender criteria.
Providers typically limit the amount you can repay each year at up to 10% of your capital loan. However, terms vary widely and some lenders will let you make higher repayments.
If you want to pay off your entire equity release loan early, you may be able to do this. Bear in mind, though, that early repayment charges in this scenario can be high. If you think you might want to repay your loan in full at some stage, it’s important to check the lender’s small print carefully. Some lenders offer fixed or defined early repayment charges that could reduce the impact of these charges, for example.
In some cases, you might not incur any charges if you want to repay your equity release loan early. However, this will usually only apply if your lender provides what’s known as ‘downsizing protection’. Downsizing protection generally kicks in if you’ve held your lifetime mortgage for a number of years, typically three or five years, and you want to move home but you can’t take your lifetime mortgage to your new home because it doesn’t meet your provider’s lending conditions at the time. If this happens (and provided you can afford to do so), you should be able to repay your lifetime mortgage without penalty. Some new lifetime mortgages include downsizing protection from day one.
Some plans come with what’s known as ‘true’ downsizing protection. This means if the lifetime mortgage has been held for a number of years (usually five years), and you move home, you may be able to repay what you owe in full without penalty, regardless of whether the new property is suitable for you to transfer the mortgage to or not.
What are equity release early repayment charges (ERCs)?
If you want to repay your equity release plan early and don’t have downsizing protection, you’re likely to find that ERCs apply if you want to pay back more than 10% of the amount you owe in any one year. When you take out an equity release loan, your lender will offer you a plan on the basis that the capital typically will be repaid, along with interest, when you die or move into long-term care. If you choose to repay the loan early, however, your lender will need to make up for the interest lost as a result. They will usually pass these costs onto you in the form of charges.
The amount you pay in ERCs depends on your lender’s particular terms and conditions, but you should have been made aware of any possible charges when you took out the plan. ERCs may only apply for a particular number of years, after which you won’t be charged if you repay your equity release loan. Often these redemption penalties are a percentage charge of the amount repaid. They may reduce over time, so for example, you might have to pay a charge equivalent to 10% or 5% of the amount repaid in year one, reducing to a smaller percentage in subsequent years.
Can you repay a RIO mortgage early?
Whether you can repay a RIO mortgage early also depends on your particular lender’s terms and conditions. RIO mortgages have no set term, and the specific terms vary widely. Like standard mortgages, you can usually make overpayments of up to 10% of your outstanding mortgage balance each year without penalty, on top of your monthly interest payments. This enables you to leave a greater proportion of your property’s value to family and loved ones when you die.
Depending on your lender’s terms, you may be able to repay the full amount owed on a RIO mortgage early. However, you could face hefty early repayment charges, depending on how long you’ve had the mortgage.
ERCs on RIO mortgages, like those on lifetime mortgages, are usually a fixed, stepped percentage which reduces depending on how long you’ve had the mortgage. For example, Legal & General charges a 9% ERC in years one to five, reducing to 1% in years 13 to 15 if you repay your mortgage in full or make overpayments above 10% of your mortgage balance.
Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage. If you’re looking for somewhere to start, you can speak to a Rest Less Mortgages advisor and get high quality advice on residential, retirement interest-only, equity release and buy-to-let mortgages.
Where to seek advice
Both equity release and RIO mortgages vary widely in their particular terms and conditions. This includes how much of your loan you can repay early, and any charges you may incur. Like any financial product, one of the biggest challenges is comparing all of the different options and knowing which will be the most suitable for you.
If you’re considering equity release, your first step should be to seek advice from a qualified financial advisor. You can find a local financial advisor on VouchedFor, the review website for financial advisors, or Unbiased, which connects users to advisors in their area, or for more information, check out our guides on How to find the right financial advisor for you.
They can help you understand the best option for you and recommend a suitable product from a member of the Equity Release Council (ERC). The council has a number of product standards which help safeguard borrowers so it is important that any provider you choose is a member. Advisors can also be members of the ERC. You can search for an equity release provider that belongs to the ERC here.
If you’re looking for somewhere to start, you can get expert advice from a Rest Less Mortgages equity release specialist. They are active members of the ERC and can advise on equity release mortgages from the whole of the market. They’ll listen to your needs and talk you through your options, so you can decide if equity release is the right option for you.
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