Understanding Early Repayment Charges in Lifetime Mortgages

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If you’ve had a mortgage before, you’re probably familiar with ‘early repayment charges’ (ERCs). They’re common in fixed or discounted rate deals, but knowing how they operate, especially in lifetime mortgages, is crucial.

Lifetime mortgages are meant to last your lifetime, unless specific events occur, such as the last person on the mortgage passing away or moving into long-term care. However, if you decide to pay off your lifetime mortgage early, you might face ERCs if you’re still within the agreed ERC period.

Early Repayment Charges (ERCs) are fees you might need to pay if you pay off your loan early. They can be fixed or variable. Fixed ERCs are like set penalties that decrease over time, while variable ERCs depend on changes in something called “gilt yields,” which are linked to government bonds.

With variable ERCs, if gilt yields fall, you might have to pay a charge based on how much they fell and the amount you borrowed, but if they rise, you might not have to pay anything extra.

But here’s the good news: lifetime mortgage plans often include features to help reduce or avoid ERCs if you choose to repay early:

1. Joint Policy Holder Events: Allows repayment without ERCs within three years of a joint policy holder passing away or moving into long-term care, giving flexibility without worrying about penalties.

2. Moving Home: Some plans permit repayment with no penalty when moving home, offering flexibility in changing circumstances.

3. Annual Repayments: The Equity Release Council requires all providers to allow repayments of up to 10% of the amount borrowed each year without penalty, helping to reduce the balance over time.

4. Transfer to New Property: Plans allow you to move your equity release plan to a new property without incurring ERCs, provided the new property meets the lender’s criteria.

Understanding ERCs and the options available can empower you to make informed decisions about your lifetime mortgage plan.

For more information, contact your adviser who can support you and discuss the options available to you.

If you’d like to discuss the options available to you, contact your adviser today.

Source: Mortgage Intelligence (Published March 2024)

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