Are There Penalties In Paying Off My Equity Release Loan Early?
When taking a release of equity from your property, which is designed to run for the rest of your life, it is also important to note the roll of how the lender has to fund such a product. Being a lifetime mortgage, they need to acquire these funds at a rate that will be profitable for them over the longer term. This is totally different in concept than a traditional repayment mortgage which may only have a short tie on its rate. However, like a mortgage, there are penalties should an equity release scheme be repaid earlier than originally intended.
The majority of equity release companies use long term investments call Gilts as a barometer to gauge whether any penalty would apply should the equity release loan not run its full term & therefore leave them out of pocket. Lifetime mortgage lenders such as Aviva will measure the yield of a particular gilt from inception of the plan to the date it is repaid early. If the gilt has fallen then an early repayment charge will apply, if it has stayed the same or risen then no penalty will be applied.
There are three types of early repayment charges in the equity release market; gilt based, SWAP rates and the simpler fixed percentage penalty over a set number of years which is currently offered by LV=. However, the issue of early repayment charges has been a thorn in the side of equity release schemes, in that in some instances it has tarnished its reputation with the size of the penalty levied. The maximum penalties that can be levied on current lifetime mortgage schemes can be upto 25% of the amount repaid which can be substantial on larger equity release loans.
Again, the role of your equity release specialist is to ensure your future intentions are noted & the best equity release plan for your situation now, and in the future is recommended. This may not therefore relate to interest rates, but can actually be around the principles of the lenders early repayment charge structure. Remember equity release is designed for the long term.