Equity Release Penalty Free Repayments

The Equity Release Council (ERC) has made penalty-free repayments a new standard for Equity Release member firms.

The new standard was introduced today.

What’s the problem with equity release repayment penalties?

Many equity release providers borrow money via corporate bonds to then lend to people who wish to release equity from their home.  A bond is a fixed rate security paying a fixed rate of interest with a fixed repayment date and capital repayment value.

If Rates Rise

• If interest rates rise, if demand for bonds fall, i.e. Bond/Gilt Yields rise.
• The real time sale value of the bond debt will fall meaning it is cheaper for the equity release firm to repay its debt when you make repayments on your equity release loan.
• I.e. little or no redemption penalties on repayment equity release loan.

If Rates Fall

• If interest rates fall and/or demand for bonds increase (as a safe haven investment) i.e., Bond/Gilt Yields fall.
• The real time sale value of the bond debt will rise and becomes more expensive for the equity release firm to repay its debt when you make repayments on your equity release loan.
• Meaning higher redemption penalties on repayment equity release loan.

Interest rates are currently on an upwards track as inflation forces the Bank of England to increase rates to try and curb inflation.  This means that corporate debt values of equity release companies is falling meaning less or indeed no penalties.

It is an ideal time for the Equity Release Council to introduce a penalty free repayment standard as equity release companies should likely not make losses when repaying their debt linked to the money that they lent you via equity release.

The Five Equity Release Council Standards

• The right to stay in your home for the rest of your life.
• No negative equity guarantees.
• Fixed or capped interest rates for life on your equity release loan.
• The right to transfer your equity release loan to another property, assuming your new home is acceptable.
• New Standard:  The right to penalty free full or partial repayments.

Comment

This is fantastic news for the equity release market.  Over the years, our circumstances change, we may inherit money, we may win money and wish to repay some or all the debt or we may wish to downsize our property and repay debt.  By now having no penalties, this makes it much easier for people to get out of an equity release loan.  It may also make equity release more attractive to many property owners that have avoided equity release schemes thus far.