Equity Release Council makes penalty-free repayments ‘standard’

The change, introduced today (March 28), is aimed at trying to reduce the effects of compound interest and cut overall later life borrowing costs for customers.

It comes as the council calculated £78mn in penalty-free partial repayments made by customers last year through providers which offer the feature. These repayments, the council said, have reduced these customers’ interest costs collectively “by almost £100mn” over the next 20 years.

By introducing the new product standard, we expect many more customers are set to benefit.Jim Boyd

This penalty-free partial repayment option forms the fifth ‘product standard’ set by the representative sector body. The other four have been in place since 1991, when the council was established.

They include: 

• The customer’s right to remain living in their home for their entire lifetime, taking away the risk of repossession created by repayment obligations;
• A fixed or capped interest rate for life, so customers’ existing borrowing is never affected by interest rate rises;
• A no negative equity guarantee, so customers can never owe more than their home is worth or leave any debt behind;
• The customer’s right to move their loan to another property, providing the lending criteria allows it.

Historically, the term ‘equity release’ has been associated with scandals and customer debt. This is because of a number of instances during the 1980s and 1990s where customers took out an equity release loan only to be left with large amounts of debt which was then passed on to their family members.

An equity release loan unlocks a tax free lump sum of a home's equity. Unlike its predecessors, equity loan products today allow 100 per cent ownership of the property to remain with the owner. In the past, an equity release loan has seen a lender give a homeowner cash in return for a share in the proceeds of the sale of their property at a later date.

The Equity Release Council was set up in the early 1990s to combat the negative image this product had picked up, and to legitimise the status of equity release providers - in part by introducing sector-wide rules such as the above (though they are voluntary).

“The right to remain in your home for life, with no requirement to make ongoing repayments and no threat of repossession, has been central to the appeal of equity release since 1991 and remains a core pillar of the modern market,” said Jim Boyd, the Equity Release Council’s chief executive.

“Our new product standard adds to this by ensuring people have the freedom to reduce their borrowing if circumstances change.

“The market’s evolution means many customers are already saving tens of millions of pounds in interest costs by making penalty-free partial repayments as and when they can afford to. 

“By introducing the new product standard, we expect many more customers are set to benefit as all new products will have this safeguard built in.”

According to the council’s data, around 125,000 penalty-free part repayments were made in 2021, averaging £608 each time.

Some 700 firms are currently signed up to the council’s voluntary standards, including “all current product providers”.

Craig Brown, chief executive of Legal & General Home Finance, said he welcomed the new Equity Release Council standard, which he believes puts “greater importance on flexibility and choice across the industry”.

“Whatever the requirement, we recognise that a ‘one size fits all’ approach does not work for this market,” he explained.

“People’s needs in retirement are individual, and our products reflect that. Some customers choose to just pay the interest from their loan, while others may decide to make partial repayments, manage the amount of loan they drawdown, or borrow as they need it.”

ruby.hinchliffe@ft.com