Equity Release: How do voluntary repayment plans work?

If you’re considering an equity release plan but would like to leave a considerable inheritance and stay on top of the lifetime mortgage scheme, a voluntary repayment plan might be the right product for you. Here, we guide you through how it works, the benefits, and what you should consider.

What is a voluntary repayment plan?

A voluntary repayment plan is an equity release scheme that allows you to borrow money against the value of your property. Unlike a standard lifetime mortgage, where interest compounds over time until you sell your property at the end of the plan, you can start repaying the loan amount and interest from the start with a voluntary repayment plan.

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This option ensures that the amount you have to pay off at the end of the plan is lower, leaving a larger inheritance for your loved ones. How much you pay and when is up to you, with a 40% limit on the amount borrowed yearly, penalty-free.

To be eligible for this scheme, you need to meet the usual requirements of a standard lifetime mortgage plan:

• You must be at least 55-years old.
• Your property must have a value of at least £70,000.

How does a voluntary repayment plan work?

Like a standard lifetime mortgage, you will borrow cash against the value of your property. That loan will have an interest rate that will compound over time. However, unlike a standard lifetime mortgage, where you don’t make monthly repayments, you can start making voluntary payments from the getgo to cover the interest rate cost and part of the loan over time.

You must also choose whether you want a lump sum payment or the drawdown option, where you release short sums of cash over time.

What are the benefits of voluntary repayment plans?

So, you might be wondering – why wouldn’t I receive a lump sum now and then pay the loan and interest cost at the end of the plan when I pass away or go into full-time care? The main benefit, of course, is that the amount you have to pay at the end of your plan will be much smaller than with other plans.

This means that you can leave a much larger inheritance to your loved ones. The cost of your mortgage will also not rise as high due to interest roll-up compared with other lifetime mortgage schemes. Here are some other advantages to a voluntary repayment plan:

• You won’t be required to show proof of funds, unlike with traditional mortgages.
• You’ll receive tax-free funds.
• Guaranteed no-negative equity.
• You retain full ownership of your property.

If you’d like to know how a voluntary repayment plan can be beneficial to your specific requirements, contact a professional advisor to discuss your options.

How much equity can you release through a voluntary repayment plan?

The amount of money you can release will depend on your age and the value of your property. You can find helpful online quote calculators that can provide an estimate of how much you can borrow.

Here’s an example quote:

• A 65-year old with a property valued at £250,000 can release £89,950 at 3.71%. The maximum available would be £102,500 at 6.32%, and the lowest rate is £53,150 at 2.93%.

Note that how much is available to you will depend on your circumstances and how much your property is worth.

What should you consider before choosing a voluntary repayment plan?

A voluntary repayment plan is a fantastic way to get access to funds in your retirement whilst still staying on top of the lifetime mortgage scheme. There are, however, certain factors that you should consider before making a decision.

• Since you’ll be paying a voluntary amount each month, you’ll need a surplus of income from your pension to cover the cost of the voluntary repayment plan.
• Borrowing against your property will mean that the amount you leave as an inheritance will be considerably lower.

Can you get approval if you already have a standard mortgage?

You can still apply and be approved for a voluntary repayment plan if you still have an outstanding balance to pay on your standard mortgage. However, the lender will use part of the funds you release to clear the due amount and become the lead mortgage provider of the property.

As a result, an equity release scheme might not be optimal for you if you still have a significant amount to pay on your first mortgage.

Can you cancel your voluntary repayment plan early?

If you’re worried about the lifetime commitment of an equity release scheme, you can rest assured that you can exit the plan early. It’s normal, circumstances change, and you might not need it anymore.

In this case, the lender will apply an early repayment fee which could be costly. It all depends on how far into the plan you’ve gone. Make sure to consider the fee and the reason for exiting the plan to ensure that it’s worth your while.

Where can you get the best rates?

You should always get in touch with an advisor and broker before making a decision. They can guide you on the best course of action. You can use a broker and a comparison engine online to search the market for the best rates. You should also be proactive and get quotes from multiple providers to compare. Remember that the first quote you receive isn’t necessarily the best one.

Is a voluntary repayment plan right for you?

There are many advantages to a voluntary repayment plan that you can benefit from if you’re in or nearing retirement age. A voluntary repayment plan is best if you have the disposable income to keep up with the monthly payments. If you find that the cost is too high, you can always opt for an interest-only lifetime mortgage. This would reduce your monthly cost as you only pay off the interest each month.