How you can use optional over payments to reduce the roll up of interest on a lifetime mortgage / equity release

How Overpayments Work on Equity Release

Equity release is a method of freeing up cash that’s been trapped in your property, tax-free, allowing you to remain in your home. It could also serve as an additional source of income, providing extra funds when needed.

Equity release options range from lifetime mortgages to home reversion plans, all of which must meet the standards set out by the Equity Release Council and provide a no negative equity guarantee.

Optional over payments

Utilizing optional over payments on your lifetime mortgage or equity release loan is an effective way to reduce the accumulation of interest. These overpayments can be made up to a set percentage of your loan amount at no extra charge.

The lender typically applies any overpayments towards the remaining capital balance, so homeowners will owe less when their lifetime mortgage or equity release ends. However, it’s wise to double-check with your lender first since making extra payments may lead to early repayment charges.

On all new lifetime mortgages and equity release plans launched after January 2022, optional overpayments are available as either a lump sum or part of the interest paid each month.

They can be used for paying off your existing mortgage, helping with home renovations or leaving a larger inheritance for your family. Furthermore, they give you the flexibility to stop or start these repayments whenever desired. Furthermore, they come with no negative equity guarantee and optional inheritance protection.

Fixed overpayments

There are various methods to reduce the interest accrual on a lifetime mortgage/equity release, one of which is making fixed overpayments. These can be as large as the loan amount and could save you substantial money over its duration.

Be mindful not to overpay, as early repayment charges (ERCs) may apply if you make a large payment outside your agreed allowances.

An extra payment of £1,000 each month could save you a substantial amount in interest and shorten the term of your mortgage.

Making overpayments to reduce your mortgage balance could be the wisest decision you make, but first consult an adviser experienced in equity release to get the best deal for your specific circumstances. A reliable financial adviser can provide you with relevant information in the most useful format and suggest suitable products tailored to meet your requirements.

Variable overpayments

Variable overpayments can be an effective way to slow the accumulation of interest on a lifetime mortgage or equity release. This may help reduce your debt load and allow for faster remortgaging than you otherwise would have been able to, but it’s essential that you discuss any overpayment plans with your lender first.

Overpayments can increase the equity you own and lower your loan-to-value ratio, giving you more remortgage options in the future. Be sure to review your lender’s rules before overpaying though; there may be penalties (including early repayment charges) if you go over budget.

Lenders must disclose any restrictions on lump sum and regular overpayments on a lifetime mortgage or equity release agreement. They also need to inform you whether or not the amount on which interest is recalculated is reduced immediately upon receiving either of these payments.

Early repayment charges

When you release equity on a lifetime mortgage/equity release, your lender may ask that you repay some or all of the money borrowed at some point in order to reduce interest accumulation on the loan.

This is a widely-used practice in the finance industry to protect lenders against losses that could occur when you release equity over an extended period. Early repayment charges can be costly, so it is essential that you comprehend them before taking out an equity release plan.

Certain equity release plans offer customers the option to repay their loan early without incurring any fees. This feature, known as downsizing protection, can be an advantageous bonus to look out for when selecting your equity release plan.

The More2Life Capital Choice Ultra Lite plan offers fixed early repayment charges of 5% for the first five years, then 3% for each subsequent five years and none thereafter. This feature can be especially advantageous if you decide to move home before your lifetime mortgage has been fully repaid.