How Equity Release Scheme Early Exit Penalties Are Applied on Lifetime Mortgages in the UK
Equity release scheme early exit penalties can be quite onerous and if you feel that there may be a possibility of selling your property at some stage for example to live in Spain, then you should think twice about a Lifetime Mortgage or Home Reversion plan.
Penalties could be as high as 25% of the original advance and usually depends on interest rate movements.
In other words if future interest rates fall and your fixed lifetime rate becomes less competitive than other similar equity release schemes, you may understandably wish to transfer your lifetime mortgage to get a lower fixed interest rate.
Of course if this happened with all of their equity release plan holders, your equity release company could suffer substantial losses.
However if rates had risen higher than at the time your lifetime mortgage was completed, there may not be any early repayment penalty with certain schemes.
The size of your penalty could be measured by the interest rate difference from which you would benefit if you transferred to a lower interest rate scheme offered by another equity release company.
Some lifetime mortgage companies place a limit on this charge based on say 25% of the initial advance.
Others may cap the early exit penalty at 20% of the total advances taken so this would affect draw down schemes.
The problem with this method of calculation is that future rate movements are uncertain so you will only know if you must pay a penalty at the time you sell your property or transfer to a lower interest rate.
The barometer often used to calculate the interest rate penalty at the time you pay off your lifetime mortgage early is often based the prevailing yield (annual return) on a certain British Government Gilt edged stock such as Treasury 2028.
Gilts are a way in which the government borrows money and there are different issues.
Without going into detail this is a way for equity release lifetime mortgage providers to measure the effect of changing interest rates.
The Gilt yield early mortgage redemption method is a complicated way of charging exit penalties on a lifetime fixed rate mortgage and difficult for many people to understand.
Before entering such an agreement you should look at the examples given in the scheme providers literature that may show different examples.
There are some equity release schemes that have a far more easy to understand early exit calculation.
They simply impose a charge of say 5% of the original advance if you pay off your mortgage during the first five years, perhaps reducing to 3% over the following 5 years and nothing after ten years.
Equity release lifetime mortgages with a variable interest rate do not usually impose early exit penalties.
However the future rate of interest and accumulated mortgage is unknown.
Therefore if interest rates increase substantially, the equity in your property may be swallowed up more rapidly.
If you are uncertain about early exit penalties you should always seek independent qualified advice before making any decisions.
Penalties could be as high as 25% of the original advance and usually depends on interest rate movements.
In other words if future interest rates fall and your fixed lifetime rate becomes less competitive than other similar equity release schemes, you may understandably wish to transfer your lifetime mortgage to get a lower fixed interest rate.
Of course if this happened with all of their equity release plan holders, your equity release company could suffer substantial losses.
However if rates had risen higher than at the time your lifetime mortgage was completed, there may not be any early repayment penalty with certain schemes.
The size of your penalty could be measured by the interest rate difference from which you would benefit if you transferred to a lower interest rate scheme offered by another equity release company.
Some lifetime mortgage companies place a limit on this charge based on say 25% of the initial advance.
Others may cap the early exit penalty at 20% of the total advances taken so this would affect draw down schemes.
The problem with this method of calculation is that future rate movements are uncertain so you will only know if you must pay a penalty at the time you sell your property or transfer to a lower interest rate.
The barometer often used to calculate the interest rate penalty at the time you pay off your lifetime mortgage early is often based the prevailing yield (annual return) on a certain British Government Gilt edged stock such as Treasury 2028.
Gilts are a way in which the government borrows money and there are different issues.
Without going into detail this is a way for equity release lifetime mortgage providers to measure the effect of changing interest rates.
The Gilt yield early mortgage redemption method is a complicated way of charging exit penalties on a lifetime fixed rate mortgage and difficult for many people to understand.
Before entering such an agreement you should look at the examples given in the scheme providers literature that may show different examples.
There are some equity release schemes that have a far more easy to understand early exit calculation.
They simply impose a charge of say 5% of the original advance if you pay off your mortgage during the first five years, perhaps reducing to 3% over the following 5 years and nothing after ten years.
Equity release lifetime mortgages with a variable interest rate do not usually impose early exit penalties.
However the future rate of interest and accumulated mortgage is unknown.
Therefore if interest rates increase substantially, the equity in your property may be swallowed up more rapidly.
If you are uncertain about early exit penalties you should always seek independent qualified advice before making any decisions.