Equity Release Early Repayment Charges

Equity release lenders fund lifetime mortgages by raising money in the bond markets - typically matching the lifetime of the mortgage to long-dated bonds. If you repay early, the lender loses the future interest income they planned for and may face a mismatch in their funding costs. ERCs compensate the lender for this disruption.

Not all plans have the same ERC structure - choosing a plan partly on the basis of its ERC structure is a legitimate consideration, particularly if you think you may want to repay early.

Fixed ERCs decline on a set schedule - for example:

• Year 1: 5% of loan
• Year 2: 4%
• Year 3: 3%
• Year 4: 2%
• Year 5: 1%
• Year 6+: nil

After the fixed ERC period (typically 5-8 years), you can repay at any time without penalty. Fixed ERCs are predictable and easy to plan around. They are typically preferable for clients who may need to repay the plan within a known timeframe.

Gilt-indexed ERCs are calculated by reference to changes in gilt (UK government bond) yields. When gilt yields fall, gilt-indexed ERCs can be very high - sometimes 15-25% or more of the outstanding balance. When yields rise, ERCs may be low or even zero.

Gilt-indexed ERCs are less predictable than fixed ERCs and can be significantly higher in falling interest rate environments. They are the more common structure among larger lenders. Clients who are concerned about early repayment should specifically ask about the ERC type.

You can repay an equity release plan without early repayment charges in the following circumstances:

• Death of the last borrower (the estate repays the plan on sale of the property)
• Moving into long-term care - most plans waive ERCs when both borrowers have moved into care
• Downsizing Protection - available if the plan has been held for at least 3 years and the new property does not meet the lender's lending criteria
• Some plans include specific "ERC holiday" provisions - waiving charges after a set period regardless of circumstances
• Fixed ERC plans after the initial charge period expires

Most ERC-approved lifetime mortgages allow voluntary partial repayments of up to 10% of the original loan per year without ERCs. This allows you to manage the growing balance without full repayment.

Aviva, Legal & General, Just, Canada Life, and most other major providers all include this feature. The exact allowance varies by plan and is documented in the Key Facts Illustration.