Early Repayment Charges (ERC)

From the outset, Lifetime Mortgages are not designed to be repaid early. The term Lifetime sets the expectation and this is an area your adviser will discuss at length to determine if you have any thoughts of repaying early. Under these circumstances, the best advice may be not to proceed with the application. That said, a Lifetime Mortgage can be repaid at any time but could be subject to Early Repayment Charge penalties.

The traditional way was to have Variable ERCs, also known as, Gilt based ERCs. Gilts are Government stock that can be bought and sold just like normal stocks and shares, On the day you take out your Lifetime Mortgage the Gilt rate is noted on the contract. This is called the Headline Rate. When you want to repay your mortgage in part or in full, the lender checks what the then-current Gilt rate is. If it is higher than when you took out the mortgage there would be no ERC. However, if it’s lower there would be. Depending on the difference the ERC could be as much as 25 per cent of the amount you borrowed.

Most lenders are moving away from this method and adopting Fixed Rate ERCs. These are expressed as a percentage of the amount borrowed, or sometimes the amount outstanding, including compound interest. They’re spread over a number of years, for instance, 5 per cent charged in years 1 – 5  then 3 per cent charged in years 6 – 10 then nil from that point forwards.

All lenders have their own variations.

Some lenders are now offering flexibility around what happens when the first partner either dies or goes into long term care. They’ll allow the survivor to sell the home and repay the mortgage, without penalty, any time during the first three years after the event. This gives the survivor time to consider their options. One year to grieve, a year to determine if they want to stay and a year to plan and complete the move.

Finally, most modern plans allow for ad-hoc, or irregular repayments up to a certain percentage every year without incurring any ERCs. Typically, this is 10 per cent of the original amount borrowed for every year you have the mortgage. Some lenders will allow six payments per year, others may say 4 payments per year. There’s an increasing trend for lenders to accept monthly standing orders. This means you can service the debt with no commitment and penalty-free within the stated limits of your contract.

Ad-hoc payments allow an opportunity to not only service annual interest, thus eliminating the effect of compound interest, but to reduce the capital amount outstanding as well.

I would stress the importance of checking your plan details in the illustration, KFI document that will be provided by your adviser. This document will detail all the costs, charges and terms and conditions of the plan that’s being recommended.