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What are “Early Repayment Charges” and why do they apply to my equity release plan?

An “early repayment charge” is a charge which your product provider may require if you repay some or the entire amount which you have borrowed before a date or event which is specified in your contract.  For equity release plans (lifetime mortgages) there is no fixed “term” or date by which you are expected to repay your loan – it remains in place until death, or if you need to sell the property or move into long-term care. The rate of interest which you pay your provider will not change during the life of your contract. In addition, please note that your estate will not be charged an Early Repayment Charge if you move into long term care.

However, if you repay your loan early, this may have an impact on your provider’s calculations and specifically, on how much it actually costs your provider to end your contract. The lending process for your provider means they will have to work out how they are going to be able to afford to lend you the amount you need and they will have to make some assumptions about how long it will be before you or your estate repay the money borrowed.  In the meantime, your provider will be paying interest on money which they have borrowed in order to be able to lend to you.  If you repay earlier than expected and given that your provider has already entered a lending agreement themselves to be able to lend to you, then they will have to secure the interest to ‘cover’ for the remaining time that they had assumed your loan would last and for which they have paid interest. This is why providers usually require you to pay an “early repayment charge”.

Before you commit yourself to taking out a lifetime mortgage, you will be given a “lifetime mortgage Illustration.”  Section 13 of that illustration is headed “what happens if you do not want this mortgage anymore?”  It explains whether an early repayment charge may apply to your plan and, if so, the basis on which the charge is calculated.  It must also show the maximum amount (in cash) that you could be liable to pay.