Penalty-free partial repayments lower total borrowing costs over time
Equity release customers will save nearly £300 million in borrowing costs over the next 20 years by making voluntary penalty-free loan repayments, according to new data from the Equity Release Council.
The data shows that homeowners with equity release plans made more than 360,000 voluntary penalty-free partial repayments to reduce their loan sizes during 2022 and 2023. The total value of these repayments grew by 18%, from £102 million in 2022 to £120 million in 2023.
Lifetime mortgages allow older homeowners to access funds from their property value, typically repaid when the customer dies or enters long-term care. However, customers can make voluntary penalty-free partial repayments to lower their total borrowing costs. This feature has been compulsory for all products meeting council standards since March 28, 2022.
These repayments reduce the compounding of interest over time. Importantly, customers retain the right to make voluntary repayments without the risk of home repossession for missed payments. There is also no requirement for customers to pass affordability tests to qualify for a loan, unlike standard interest-only or capital-and-interest repayment mortgages.
Despite a 9% dip in the total number of repayments from 2022 to 2023, the average repayment size increased by 30%, from £538 to £697, suggesting that while the frequency of payments was impacted by the cost-of-living challenges, customers still sought to reduce their borrowing when possible.
The increase in the total value of repayments and the larger average repayment size in 2023 indicate that customers who could afford to repay made more substantial efforts to cut their loan sizes and borrowing costs.
“These figures highlight how the flexible design of modern equity release products gives customers more levers to pull to adapt to changing circumstances,” said Jim Boyd (pictured), chief executive of the Equity Release Council. “The blend of innovative product design and clear consumer standards has proved transformative by putting customers in control.
“While equity release helps people maximise their money in later life, with no ongoing repayments required, people are making significant savings by chipping away at their loans when they can afford to.
“Small repayment habits add up to significant savings over time. Voluntary repayments make it possible for customers to access property wealth in the here-and-now while increasing the chances of preserving something to leave behind as a traditional inheritance.”
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