Equity release providers must soon let new borrowers make penalty-free repayments to cut the size of their loans
Providers of equity release plans will be required to allow new borrowers to make penalty-free repayments in order to reduce the size of their loans.
The requirement, set by the Equity Release Council that oversees standards across the market, is being introduced from the end of March – and will apply to all new plan sales.
The move is designed to make the plans more appealing – and ward off criticism that they remain too expensive. Bought by the over-55s, equity release plans enable borrowers to take out a loan against the value of their home without being required to make monthly interest payments.
New requirement: Equity release plans enable borrowers to take out a loan against the value of their home without being required to make monthly interest payments
Instead, the interest – typically set at a fixed rate – rolls up into the loan, increasing its size over time. The debt is usually repaid when the homeowner dies or requires long-term care.
The new requirement on allowing borrowers to repay chunks of their loan is the fifth ‘standard’ the council has imposed on lenders that offer equity release.
Big players include Aviva, LV, Legal & General, More2Life and building society Nationwide.
Other key standards include the crucial guarantee that the debt accumulated under a plan can never exceed the value of a borrower’s home – and that a borrower has the right to remain in their property for life or until they need care.
Although the new standard only applies to loans bought after March 28, many providers already allow existing borrowers to make penalty-free payments, although typically a cap on the size of payments made is imposed.
Jim Boyd, chief executive of the council, says the new standard is a reflection of the industry’s determination to offer borrowers more flexible plans.
Boyd adds: ‘As an industry, we need to develop products that meet changing demographic needs. The new standard on penalty-free repayments will appeal to those who may have later-life earnings or come into an inheritance.’