What are fixed and gilt linked early repayment charges?
Most lifetime mortgage borrowers will never have to pay an early repayment charge (ERC). However, ERCs might be imposed by provider if a borrower wants to make repayments above the agreed limits or before a lifetime mortgage has run its full course. ERCs are there to cover the losses the provider may incur when a borrower repays sooner than was expected and there are two different types.
The first type, fixed (or defined) amount ERCs, are fixed but they can taper. For example, a provider might charge a penalty of 10% in year one, 9% in year two, 8% in year three and so on. Each provider has its own variation of this sliding scale, but borrowers will always know the fixed penalty up front.
The second type, variable ERCs, can seem complicated, but they are quite straightforward and are based on the value of something called a gilt. Gilts are government bonds often favoured by investors making long term investments, such as equity release providers.
If gilt yields rise in the time between the borrower taking out equity release and when they try to repay early, no ERC will be due. But if they have fallen, the provider will impose an ERC relative to the fall in value.
Gilt linked ERCs typically are capped at 25% of the amount borrowed and there are some instances when neither a fixed nor gilt-linked ERC will apply, such a compassionate window.
The Equity Release Council has produced two consumer factsheets which are available at the following links early repayment charges explained and calculating early repayment charges. Borrowers should always seek guidance from an adviser.