Can you pay off a lifetime mortgage early?

A lifetime mortgage, the most common type of equity release plan, is designed to last for the rest of your life. In most cases, the loan is repaid when the last remaining borrower passes away or moves into long-term care, and the property is sold.

However, circumstances can change over time. You may decide to move home, receive an inheritance, or wish to downsize without taking your lifetime mortgage with you. In some situations, you may decide to repay part or all of your lifetime mortgage earlier than originally planned.

If you decide to pay off a lifetime mortgage early, Early Repayment Charges (ERCs) may apply. Understanding how ERCs work and any terminology related to them can help you plan ahead and better understand the potential costs that could apply.

Why might someone want to repay a lifetime mortgage early?

While early repayment isn't right for everyone, there are circumstances where someone may choose to repay part or all of their lifetime mortgage.

• Circumstances that may lead someone to consider early repayment include:

• Receiving an inheritance or pension lump sum

• Investments maturing or the sale of a buy to let property

• Downsizing to a smaller home* 

• Deciding to move in with family

(*Many lifetime mortgages can be transferred to a new property, subject to lender criteria. This is known as porting.)

These are just some examples, and there may be other reasons why someone chooses to repay their lifetime mortgage early. Before deciding if you want to repay your lifetime mortgage early, it’s important to discuss this choice with your financial adviser. They will be able to illustrate any potential ERCs that apply to your individual situation.

What are Early Repayment Charges on lifetime mortgages? 

If you've previously had a residential mortgage, you may already be familiar with charges that can apply when a mortgage is repaid early. Lifetime mortgages can also include ERCs.

The amount of any Early Repayment Charge will usually depend on your loan balance, any interest added to the loan, and the ERC percentage that applies at the time. Your financial adviser can provide an illustration, and an example is included in the next section.

One of the main differences between ERCs of a residential mortgage and a lifetime mortgage is how interest is applied. Interest compounds on a lifetime mortgage, meaning you pay interest on both the original amount and the interest already added.  The longer you have the mortgage, the more the interest compounds.

Types of Early Repayment Charges 

Residential mortgages generally have one type of Early Repayment Charge. Lifetime mortgages work a bit differently, as there are two different types: fixed and variable ERCs.

Fixed (or defined) ERCs

A fixed Early Repayment Charge is agreed when you take out your lifetime mortgage, so you'll know how the charge may reduce over time.

For example, if the lifetime mortgage you’re looking at with your adviser has a 10% ERC over 10 years, this means it reduces to 9% in year 2, 8% in year 3 and so on. By year 11 the ERC percentage will be at zero. This is provided that there is no additional borrowing with these 10 years.

(Disclaimer: Illustrative example, of 10% ERCs on a 10-year term. ERC percentage and length of ERCs on lifetime mortgages differ.)

If you are planning to pay your lifetime mortgage back early, fixed ERCs can help you plan accordingly. The longer you have a lifetime mortgage with fixed ERCs for, the more likely you are to have lower or no charges when repaying early.

For your awareness, all of Pure Retirement’s current lifetime mortgages have fixed ERCs and abide by the Equity Release Council’s 10% rule. This rule means that you have the option to repay up to 10% of your total loan amount each year without triggering these ERCs. Some lifetime mortgages allow you to pay more than 10% per year.

How fixed ERCs work if you borrow more 

If you apply for additional borrowing or are taking a withdrawal from your cash release facility, then the ERCs that apply will depend on how long you’ve held each part of your lifetime mortgage. When you apply for additional borrowing, you’ll receive an Offer letter which will include information on the Early Repayment Charge percentage that applies to the new borrowing. As this percentage may differ from the ERC on your original loan, you may wish to review both with your financial adviser so you understand how the charges could apply to each part of your borrowing.

Variable (gilt-linked) ERCs

Variable Early Repayment Charges are linked to government bond yields, often known as gilt rates. (Find out more about gilt rates and how they impact lifetime mortgage interest rates >). Depending on how these rates have changed since you took out your lifetime mortgage, the charge may be higher, lower, or in some cases not apply at all.

This will entirely depend on the terms and conditions of your lifetime mortgage. If you're comparing different types of ERCs, it's worth noting that, as of time of writing, none of Pure Retirement's current lifetime mortgages have variable ERCs.

How can I find out what Early Repayment Charge applies to me?

You can find information about any applicable Early Repayment Charges in your mortgage documentation. Your Offer letter will include the full details. If you're unsure and have a Pure lifetime mortgage, you can contact us or speak to your financial adviser, who can help you understand the options available and any costs that may apply.

When Early Repayment Charges don’t apply

Every lifetime mortgage has its own terms and conditions, so when an ERC applies will depend on your individual mortgage. The examples below are common circumstances where an ERC may not be charged and may be subject to your lender receiving the appropriate supporting evidence of these circumstances.

You may be able to repay your lifetime mortgage without an ERC in situations such as:

• You’re moving home and transferring your lifetime mortgage to another property that meets your lender's requirement.

• When the mortgage is repaid by the estate after the sole borrower, or the last remaining borrower on a joint mortgage, passes away or moves into long-term care.

• For some joint lifetime mortgages, repaying the mortgage following the passing of one borrower or their move into long-term care, where the remaining borrower is eligible to do so under the mortgage terms.

• Making partial repayments where your mortgage includes an ERC-free repayment feature. The amount you can repay, and any conditions that apply, will be set out in your mortgage terms and conditions.

Can you make partial repayments instead of paying off the whole lifetime mortgage?

You don't always need to repay your entire lifetime mortgage at once. Depending on your mortgage terms, you may be able to make optional partial repayments during the life of the mortgage.

Many lifetime mortgages allow you to repay a portion of the loan each year without triggering Early Repayment Charges. This can help reduce the balance and the amount of interest that may accrue over time.

Under the Equity Release Council's 10% rule, you can repay up to 10% of your outstanding loan each year without paying Early Repayment Charges. All current Pure Retirement lifetime mortgages include this feature, and some also allow larger repayments.

Continue your equity release research 

If you'd like to find out more about equity release, you may find our glossary helpful, as it explains some of the terms you may come across during your research. You can also visit our page on how equity release works, which covers topics such as:

• How to find an independent financial adviser

• The process of releasing equity, including costs

• Things to consider, including the pros and cons of equity release

Please note, you can only apply for a lifetime mortgage through an independent financial adviser. The industry-body of equity release, the Equity Release Council, has a helpful overview of getting started.

Disclaimer: If you’re looking to borrow money via equity release, you should understand any potential ERCs before taking out a plan and discuss them with your financial adviser. It’s worth knowing that you can repay your lifetime mortgage in full at any time, and you are also able to make optional partial repayments.