Cutting the cost of equity release
Equity release, as the name suggests, involves taking out some of the equity tied up in your home.
Many homeowners are put off using equity release to unlock some of their property wealth because they worry that it is too expensive, but it is possible to reduce costs by making voluntary repayments.
Equity release, as the name suggests, involves taking out some of the equity tied up in your home. You must be aged at least 55 to be eligible, and the maximum amount you can borrow is usually up to 60% of the value of your home.
Unlike a standard mortgage, with equity release you don’t make monthly repayments, so interest rolls up over time. This must only be repaid, along with the capital borrowed, either when you die or move into long-term care and the property is sold. As you’re not usually paying back what you owe, interest can mount up quickly as you’re effectively paying interest on top of the interest you’ve already been charged, known as compounding.
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However, people are often unaware that lifetime mortgages – the most popular form of equity release plan – usually allow you to make repayments when you can afford to, helping you to reduce the overall cost. Making voluntary penalty-free part repayments was made a compulsory feature for all equity release products that meet standards laid down by the Equity Release Council, the trade body for the sector, with effect from 28 March last year.
Growing numbers making voluntary repayments
According to latest data from the Council, 90,000 equity release customers made voluntary repayments last year, up 48% compared to 2021. In total, it estimates that partial repayments have saved these customers £116m in future costs over the next 20 years by reducing compound interest.
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David Burrowes, chair of the Equity Release Council, said: “People can choose whether they want to make repayments without fear of losing their homes, and since this feature was embedded into Equity Release Council standards, we have seen people’s usage grow and their interest savings add up. By making modest repayments when they can afford to, customers can benefit from their property wealth in the here-and-now while reducing their overall borrowing costs by tens of thousands of pounds.”
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The main benefit of making repayments while you are still alive is that because you’ll have reduced your interest costs, more of your property wealth will be preserved to pass on to your loved ones as an inheritance, or for future use.
Bear in mind, however, that if you are planning to make voluntary payments, it’s crucial you check the small print of your plan or speak to your lender first, so you’re clear on exactly what you can and can’t do. For example, you can usually pay back up to 10% of the amount you owe each year without penalty, but if you want to repay more than this you may find early repayment charges apply.
If you’re considering equity release, it’s essential to seek professional financial advice from a qualified equity release adviser, so that you can be certain it’s the right option for you based on your individual circumstances.