| Anyone considering taking out equity release has | | | | death or moving into long term care. Additionally, where |
| many choices to make. One of the biggest & most | | | | some lenders invoke a charge for a set period of time, |
| expensive if not advised correctly could be on early | | | | once this term has expired there would be no penalty |
| repayment of an equity release scheme. | | | | thereafter. |
| However, before we delve into the main differences | | | | However, there would potentially be a penalty if the |
| between current equity release schemes we briefly | | | | property was sold during the lifetime of the owner for |
| look at why early repayment charges exist & how | | | | example if an inheritance was received or downsizing |
| they can arise. | | | | occurred & the scheme was repaid as a |
| Primarily, equity release is designed to run for the rest | | | | consequence. |
| of your life. There is no fixed term & the scheme will | | | | In addition to the early repayment charge the lender |
| continue to run until the second person has died or | | | | could also levy an administration fee which can vary |
| moved into care. | | | | from zero to £300. How do lenders calculate the |
| At that point the property is usually sold, with the equity | | | | early repayment charge & how much can it be? The |
| release provider being repaid first from the proceeds | | | | answer to this varies significantly & this can be |
| & any remaining balance is passed into their estate. | | | | evidenced by the following: - |
| With the earliest age of starting one of these | | | | Aviva |
| schemes being 55, the total term could well be in | | | | 1. Charge applicable over the remainder of the plan |
| excess of 30 years. For this reason lenders hedge | | | | term |
| their bets in order to recover any potential early | | | | 2. Charge linked to government gilt yields |
| repayment which may cost them significantly. | | | | 3. Penalty is a maximum 25% of initial advance |
| Obviously life expectancy for everyone differs. The | | | | Hodge |
| Financial Services Authority (FSA) use average life | | | | 1. 10 years penalty term |
| expectancy data in order to provide the basis of a | | | | 2. Penalty based on number of years elapsed |
| lenders key facts illustration (quote). | | | | 3. Maximum 5% penalty |
| It is with this same information that lenders will also | | | | Just Retirement |
| formulate their early repayment charge structure. | | | | 1. Charge applies for the remainder of the plan term |
| We can relate such charges with a conventional | | | | 2. Charge depends on movement of FTSE UK 15 |
| mortgage, whereby upon early repayment within a | | | | year gilt yield |
| specified term the borrower will incur an early | | | | 3. Penalty is a maximum 20% of advances |
| repayment charge. So, upon what circumstances | | | | LV= |
| would an early repayment charge exist? | | | | 1. 10 year penalty term |
| This could be for a number of reasons: - | | | | 2. Percentage penalty based on years elapsed |
| 1. Sale of property | | | | 3. Tied penalty structure of 5% yrs 1 to 5, 3% yrs 6 to |
| 2. Inheritance | | | | 10 |
| 3. Death | | | | As you can see, all equity release schemes have the |
| 4. Moving into long term care | | | | inclusion early repayment charges & if you are |
| However, not all the aforementioned would incur a | | | | considering early repayment it maybe a case of |
| penalty upon early repayment. | | | | damage limitation or manipulation of repayment date |
| Equity release providers would not invoke a penalty on | | | | that could avoid potential penalties. |