One aspect of equity release schemes that consumers still have some reticence about is the level of potential early repayment charges. The size of the penalty will be determined by the lender initially selected, the size of the equity release loan and the time period it is redeemed from inception.
The amount paid by the provider is calculated based on the valuation of your property, the percentage sold, and the age of the applicant. Once in place, a home reversion plan lasts until the applicant has died or moved into long term permanent care. At this point the house is sold, and the proportional amount recovered.
Any loan or investment from an equity release provider involves a certain amount of risk on the provider’s part. In case of lifetime mortgages, early repayment of the loan means that providers suffer losses due to the early termination of the loan. A provider can compensate for these losses by charging early repayment penalties to the policyholder. Different lifetime mortgage plans can have different rules with regards to early repayment, but the principle behind early repayment charges remains the same.
In case of home reversion, the amount received is not a loan, but a lump sum in exchange for the percentage of the property sold to the provider. The provider recovers this when the property is sold, from the sale value of the house. Since home reversion involves selling a portion of the property to the provider, the only way to end the plan is to buy back the share from the provider.
Any increase in property prices will apply when buying back your share from the provider. Also, while the provider buys the share at a highly discounted price, it can be bought back only at market price. This usually makes it unaffordable to end a home reversion plan as it means paying back more, and usually much more, than you have received in the first place. Any legal and other costs related with the sale must be met by the customer and not the provider, which adds to the cost of ending a home reversion plan still further.
Early termination of a home reversion plan does not have early repayment penalties, but all these factors mean that buying back your share from the home reversion provider does involve a substantial expense that must be met by the customer.
Tags:Cost of Lifetime Mortgages, Early Repayment Charges, Early Repayment Penalties, Equity Release Loan, Equity Release Provider, Equity Release Schemes, Home Reversion, Home Reversion Plan, Home Reversion Plans, Home Reversion Provider, Lifetime Mortgage Plans, Lifetime Mortgages, Long Term Permanent Care