For many people considering an equity release scheme, no early repayment charges is one of the last things they think of. The main reason for this is that many people consider it a lifetime mortgage and have no intention of repaying early. However, there is always the possibility of unforeseen circumstances which would require you making an early repayment. If you have given this option little thought it can be extremely costly with large penalties if you have chosen the wrong plan which does not support no early repayment charges.
Reasons Why You May Need No Early Repayment Charges
The future is not set in stone and when considering an equity release, it is important to evaluate this matter very carefully. It is imperative that you discuss with your advisor if you have a potential retirement strategy which would require the plan to remain in place or if there is a possibility that you could repay it. For example, you may anticipate downsizing to another property, receiving a lump sum of an inheritance or even a lottery win. These ideas may be only a dream. However, it is important to consider whether your equity release scheme allows for no early repayment charges should your circumstances change and you wish to repay the loan.
What Are the Early Repayment Charges?
The early repayment charges or penalties can vary according to the specific details laid out in your equity release scheme. Some schemes include heavy penalties if the lifetime mortgage is repaid partially or in full early. Your advisor will provide details of any restrictions, limitations or charges which can apply to early repayments. These details will be included in the Key Facts Illustration. However, if early repayment is a possibility, you should discuss it with your advisor. This will allow the advisor to locate schemes which specifically cater for these circumstances and charge minimal early repayment charges.
Are There Instances Where No Early Repayment Charges Apply?
There are a number of equity release products and lifetime mortgages which allow for early repayment with no penalties or charges. However, there are also a few instances in which no early repayment charges can be applied. These include:
1. Once the fixed term of the early repayment charges has expired. For example, Liverpool Victoria has a number of policies which have a tiered structure for early repayment penalties. The charges are set as 5% for the first five years of the loan; 3% for the next five years; and then no early repayment charges after ten years. This type of plan allows that once the plan has been established for more than ten years, there are no charges in cases of partial or full early repayment.
2. Older plans: Some older equity release plans allow for no early repayment charges. For example, Mortgage Express plans only had early repayment charges for five years and none were to be charged on any early repayment after this period. New Life Mortgages and Hodge Lifetime had similar plans. Therefore now these plans are older, they can be repaid with no penalties applied now.
3. Gilt rates are favourable for repayment: Gilts are bonds which are issued by the Government in order to raise money. There are a number of different gilts available and many lifetime mortgages and equity release schemes are linked to the rate of government gilts; for example, Just Retirement and Aviva product ranges. Generally, if the rate of the gilt has risen since the inception of the plan, it may be possible to repay without a penalty. If the rate falls, a penalty which could be up to 25% of the original sum could be applied.
4. Local building society plans: It can be possible to secure a scheme with no early repayment charges. The Vernon Building Society offers such an equity release lifetime mortgage. It is not widely advertised and is only available to certain advisors including Equity Release Supermarket. However, there is a stipulation that the client must live within a twenty-five mile radius of the society's head office in Stockport.
5. No charges when downsizing: Hodge Lifetime offers a plan called the Flexible Lifetime Mortgage. This plan allows for no charges to be levied if you downsize at least five years after taking out the equity release. This can provide a greater flexibility if you suspect that you may consider downsizing in the future.
There are a number of costs and charges associated with equity release schemes and choosing the wrong product can be a costly mistake. It is important to discuss all your future plans with your equity release advisor. This will allow them the opportunity to source a scheme which will provide minimal or no early repayment charges if your circumstances change. This can require a little forward planning but failing to consider this could result in heavy penalties.
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