ERC standards require penalty-free partial repayments

Lifetime mortgages that meet Equity Release Council standards must give customers the right to make voluntary, penalty-free partial repayments, a requirement in place since March 2022¹. The rule applies to equity release and lifetime mortgages products that fully meet the Council's standards, rather than to every plan on the market.

Equity release is a way for over-55s to borrow money by unlocking cash from the value of their home while continuing to live there¹. On a lifetime mortgage, the most popular type of equity release, there is no obligation to make interest repayments, but borrowers have the option to do so¹. Where partial repayments are made, there will usually be a limit on how much can be repaid each year, typically 10% of the loan¹.

The penalty-free right covers partial repayments only. Fully repaying a lifetime mortgage early will often trigger an early repayment charge, with the amount depending on how long the loan has been held. Which? gives the example of a 5% charge after five years or 3% after 10 years, equal to £5,000 or £3,000 on a debt of £100,000, and notes that in some cases early repayment charges can be as high as 25%¹.

Not making repayments means the debt grows through compound interest. On an initial lifetime mortgage of £100,000 at a rate of 4.5%, the debt would be £125,180 after five years and £156,699 after 10 years, reaching £196,156 after 15 years, nearly double the original amount¹.

"Since March 2022, lifetime mortgages that meet Equity Release Council standards must give customers the right to make voluntary, penalty-free partial repayments."

Which?, 5 common equity release myths, 15 June 2024¹

Separately, products that fully meet the Council's Product Standards must include a no negative equity guarantee, meaning the borrower or their estate will never owe more than the value of the property when it is sold¹. A lifetime mortgage can also be transferred to a new property, subject to the lender agreeing the new house is suitable; properties that would restrict the lender's ability to sell on the open market, such as homes within retirement complexes, are likely to be treated as unsuitable¹.

Why it matters for households

For anyone with a lifetime mortgage taken out under the standards since March 2022, the penalty-free partial repayment right is a term of the plan, not a discretionary concession. It allows the debt to be reduced without an early repayment charge, within the annual limit, which is typically 10% of the loan¹. Because interest on a lifetime mortgage compounds, repayments made earlier reduce the balance that interest is charged on, though the sources do not set out figures for how much a given partial repayment would save.

The distinction between partial and full repayment matters for households weighing up repaying equity release early. Clearing the whole loan can attract a charge of 5% after five years or 3% after 10 years on the examples given, and up to 25% in some cases¹. The no negative equity guarantee, where it applies, caps what a borrower or their estate can owe at the sale value of the property¹.

Before signing up for a lifetime mortgage, regulated advice from a qualified equity release adviser is required, a requirement of the Financial Conduct Authority, and providers selling equity release must therefore offer advice¹.