By Tom Philips at May 10, 2024

Equity Release: What are Mandatory Payments?

Equity release allows homeowners over the age of 55 years old the opportunity to release money from their home, without having to sell.

With traditional equity release loans, you do not have to repay the loan until after you pass away or move into a care home.

Upon which, your home will be sold and the equity release loan you took out will be repaid [1].

You can release a significant amount of money from your home, depending on the value of your home, your age and your current state of health. As with any loan, you will be charged interest on your equity release loan.

As your loan continues until after you pass away or move into a care home, this could compound over time. This means that you will end up owing a lot more than you initially took out.

Although this could end up compounding to a significant amount, the value of your home should always cover the loan amount.

If it does not, then the lender will pay off the difference at the time of your death, or when you move into a care home. This is called the no negative equity guarantee [1].

Across the UK, there are two main types of equity release loans, known as lifetime mortgages and home reversion plans. The differences between these two types of loans are explained below in this article.

What are mandatory payments when it comes to equity release?

As discussed above, most traditional equity release loans allow individuals to release money without having to pay off the loan until after they pass away or move into a care home for long-term care [2].

Nevertheless, interest rates have been continuing to rise over recent years, forcing a lot of equity release lenders and banks to create new products and new rules.

As a result of this, a lot of lenders across the UK are now offering mandatory payment products.

This means that you will be able to release equity from your home, but will have to make mandatory monthly payments for as long as your loan lasts [2].

These mandatory payment products are recommended to anyone aged 55 to 65 who are still able to pay off part of the interest on their loan as they go.

This will reduce the overall end loan amount, ensuring that the proceeds from the sale of your home will pay off the loan in full [2].

By agreeing to pay off some of the interest each month, this will open you up to higher loan to value ratios, meaning that you might be able to release more money by opting for this type of equity release loan.

The sharp rise in interest rates has meant that less and less lenders are able to offer lifetime mortgages to individuals, particularly if they are aged under 60.

This is why they have now resorted to offering mandatory payment loans.

Whilst doing so will ensure that you can borrow more and that the lenders will have more faith in lending to you, you will have to pass affordability checks to ensure that you can meet the monthly repayment amounts.

For a lot of people, this means that they will only be approved for this type of loan if you have an income.

Who is offering mandatory payments?

There are now an increasing number of lenders who are offering mandatory payment products.

For example, More2Life is offering a flexible payment term lifetime mortgage, which allows individuals the chance to release equity and pay off some of the interest on their loan as they go, up to the age of 66.

Once you hit 66, the interest will continue to roll up and no monthly payments are required [2].

This product is great for those who plan on staying in employment until 66 years of age, as this will ensure that they can repay the interest each month.

Legal and General Home Finance [2] are also offering payment term lifetime mortgages, available to those aged 50 or over.

This product came about because Legal and General were seeing an increasing number of people applying for equity release under the age of 55 years old.

By offering these individuals the chance to release equity from the age of 50, they’re able to pay off a significant amount of the interest off their loan whilst they still work [2].

What are the drawbacks of mandatory payments?

Whilst mandatory payments can be very helpful, it is also important to understand that there are a number of drawbacks, too. Some of these drawbacks are explained below [3].

1. Compound interest

Lifetime mortgages and payment-term equity release plans are subject to interest, which means that over the course of your equity release plan, this interest will compound. This means that as the years go on, you will owe more and more.

2. Your home may be repossessed if you do not keep up with payments

Your mandatory payments are mandatory. This means that if you do not keep up with your payments, you run the risk of your home being repossessed.

3. Reducing the value of your estate

Finally, taking out an equity release loan will mean that the value of your estate is significantly reduced, even after paying off the interest as you go.

Can I pay off some of the interest without making regular monthly payments?

Yes, with some equity release loans there is also the option to make some one-off, ad-hoc payments, usually as a lump sum.

Each lender has different loans and rules, but most do allow you to make voluntary mortgage payments whenever you want. This is usually capped to 10% a year of the total loan value.

If you want to pay any more than this, then you might be fined an early repayment charge (ERC).

This could end up being a significant amount, so make sure that you read your terms and conditions properly before signing up to an equity release loan.

These voluntary payment plans allow you to keep your compound interest down, as the overall loan amount will be reduced every time you make a payment.

It is important to remember that these payments are not mandatory at all, and if you do not make them then you stand no risk at all of having your home repossessed.

How much do mandatory payment lifetime mortgages cost?

Taking out an equity release loan will mean that you benefit from a large lump sum or a number of small payments throughout the year.

However, taking out an equity release loan will also mean that you have to pay a number of upfront costs.

These upfront costs include the cost of a solicitor, an adviser and the valuation of your home.

With any mandatory payment lifetime mortgages, you will also be charged interest on your loan which will compound and need to be repaid [4].

The cost of an equity release solicitor can be anywhere between £1,000 and £3,000 depending on the type of solicitor you opt for and how complex your loan is.

Home valuations usually sit at around £100, and payment will be taken for this at the very start of your equity release loan application [4].

How do you qualify for mandatory payment lifetime mortgages?

To qualify for equity release in the UK, you have to be aged at least 55 years old and own your own home in the UK worth at least £70,000 [5].

You must have paid off most of your traditional mortgage before applying for an equity release loan. If you have a small amount of your mortgage left to pay off, then you must agree to use the equity release loan to pay off the remaining mortgage.

If you plan on taking out a payment term mortgage, then you will also need to pass some affordability checks before getting approved for an equity release loan.

You can then be free to use the money you receive on whatever you want! This includes home improvements, holidays and giving the money to your friends and family.

Speak to Equity Release Warehouse

For more information on mandatory payments, then speak to an equity release adviser for professional help and support.

The team at Equity Release Warehouse are available both online and over the phone, to provide support and advice for anyone who is considering taking out an equity release loan.