Equity release: how making small repayments can save you thousands

The average voluntary repayment made by borrowers using equity release grew by 30% between 2022 and 2023, from £538 to £697.

The Equity Release Council (ERC), which published the figures, says that these penalty-free repayments will save customers a total of almost £169m in borrowing costs over the next 20 years.

Here, Which? explains how voluntary repayments work, how much they can save you, and how to weigh up if equity release is right for you.

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How do equity release voluntary repayments work?

Equity release is a way for over-55s to borrow money by unlocking cash from the value of their home while continuing to live there.

With lifetime mortgages, the most popular type of equity release, you take out a loan against your property, which is repaid from the proceeds of its sale when you die or move into long-term care.

Unlike ordinary mortgages, lifetime mortgages don't require you to make any monthly repayments.  

Instead, interest is rolled up and added to the loan each month. This increases the amount that will ultimately be owed. But by making voluntary penalty-free repayments, you can reduce your total borrowing costs. 

The right to make penalty-free repayments, subject to lending criteria, is one of the five product standards set by the Equity Release Council.

Lenders that meet these standards will typically allow you to repay 8%-15% of the initial loan each year without penalty. 

How much can you save by making voluntary repayments?

Analysis by the Equity Release Council shows how a customer taking an initial lump sum of £60,000 via a drawdown lifetime mortgage, could significantly reduce their long-term borrowing costs by making regular or ad hoc repayments when they can afford to.

By making regular £100 monthly repayments, the customer would save almost £17,000 over a decade in total borrowing costs, and almost £50,000 over 20 years. Those savings increase to nearly £34,000 and £99,000 with a regular £200 monthly repayment.

These examples assume an interest rate of 6.57% - the average rate for new customers in the second half of 2023.

Jim Boyd, CEO of the Equity Release Council, said: ‘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.’

Pros and cons of equity release

The amount you can borrow via equity release depends on your age and how much your home is worth. You'll need to be at least 55, but the older you are, the more you can borrow. The maximum you can borrow is around 55%.

Equity release can prove useful if you have value tied up in your property but are worried about having enough to live on in retirement or to cover care costs. 

Borrowing in this way does come with potential downsides. Not making any repayments on your loan will mean you end up paying far more than you’ve borrowed due to the compounding of interest. This could mean the value of your property is wiped out entirely.

Using equity release will most likely reduce the size of your estate and the amount you can leave behind for loved ones, as the lender is repaid before the rest is divided among beneficiaries. For this reason, it's a good idea to discuss with your family first. 

• Find out more: the pros and cons of equity release

How to arrange equity release

You'll first need to take regulated advice from a qualified equity release adviser. This is a requirement of the Financial Conduct Authority.

The Equity Release Council has a directory of financial advisers with equity release experience. 

Your chosen adviser should hold one of the following approved qualifications:

• CeRER (Certificate in Regulated Equity Release) – awarded by the Institute of Financial Services (IFS).
• CER (Certificate in Equity Release) – awarded by the Chartered Insurance Institute (CII).
• ERMAPC (Equity Release Mortgage Advice & Practice Certificate) – awarded by the Chartered Institute of Bankers in Scotland. The ERMAPC was discontinued a few years ago but may still be held by some advisers.

An adviser who isn't restricted to recommending products from just one or two firms is the preferable option.

Brokers of equity release products such as HUB Financial Solutions, Age Partnership and Key Later Life Finance can look across the whole of the market to find the product that meets your specific requirements.

Which? Limited is registered in England and Wales to 2 Marylebone Road, London NW1 4DF, company number 00677665  and is an Introducer Appointed Representative (FRN 610689) of the following:

1. Inspop.com Ltd for the introduction of non-investment motor, home, travel and pet insurance, who are authorised and regulated by the Financial Conduct Authority (FCA) to provide advice and arrange non-investment motor, home, travel and pet insurance products (FRN310635). Inspop.com Ltd is authorised and regulated by the Financial Conduct Authority (FCA) to provide advice and arrange non-investment motor, home, travel and pet insurance products (FRN310635) and is registered in England and Wales to Greyfriars House, Greyfriars Road, Cardiff, South Wales, CF10 3AL, company number 03857130. Confused.com is a trading name of Inspop.com Ltd. 

2. LifeSearch Partners Limited (FRN656479), for the introduction of Pure Protection Contracts and Private Health Insurance, who are authorised and regulated by the FCA to provide advice and arrange Pure Protection Contracts and Private Health Insurance Contracts.  LifeSearch Partners Ltd is registered in England and Wales to 3000a Parkway, Whiteley, Hampshire, PO15 7FX, company number 03412386.

3. HUB Financial Solutions, for the introduction of equity release advice, who are authorised and regulated by the Financial Conduct Authority (‘FCA’) to provide advice and guidance on financial products for those who have retired or are approaching retirement (FCA Firm Reference Number: 455713). HUB Financial Solutions is registered in England and Wales to Enterprise House, Bancroft Road, Reigate, Surrey RH12 7RP, company number 05125701.

4. Alan Boswell Insurance Brokers Ltd (FRN 301), for the introduction of non-investment landlord insurances, who are authorised and regulated by the Financial Conduct Authority to provide advice and arrange insurance contracts. Alan Boswell insurance brokers Ltd is registered in England at Prospect House, Rouen Rd, Norwich NR1 1RE, company number 02591252.

Other financial services:

Mortgage service provided by London & Country Mortgages (L&C), Unit 26 (2.06), Newark Works, 2 Foundry Lane, Bath BA2 3GZ. London & Country are authorised and regulated by the Financial Conduct Authority (registered number: 143002). The FCA does not regulate most Buy to Let mortgages. Your home or property may be repossessed if you do not keep up repayments on your mortgage.

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