Voluntary repayment schemes are lifetime mortgages. These products adhere to government regulations set out by the Financial Conduct Authority. The products also meet Equity Release Council Code of Conduct standards. The reason these products are under a different category is mainly the benefit of the lifetime mortgage.
Voluntary Repayment Option
Lifetime mortgages are designed so the homeowner doesn’t have to repay the loan until they move to a permanent care facility or death occurs. At this time in the homeowner’s situation the lump sum provided plus any interest that has accrued has to be repaid. Often the home is sold at market value to cover the loan and interest. Any remaining portion of value would go to the beneficiary.
The voluntary repayment scheme allows the homeowner to repay the loan during their life if they have extra funds to do so and all without penalty. Normally with a traditional lifetime mortgage if repayment is made there are early repayment charges. These charges apply because the provider wishes to obtain their investment funds. An early repayment means less investment. The charge is usually a percentage.
The new voluntary repayment scheme, which has become popular in the last few years as they become more available, provides the homeowner with the option of repaying without any charges.
How the Option Works
Homeowners can decide to repay the loan on monthly terms by paying just interest or paying capital and interest. Homeowners can only repay 10% of the loan per annum. Any more than 10% and there will be early repayment fees.
Voluntary repayment options are given on various types of lifetime mortgages. It is at the discretion of the provider to offer or not offer certain lifetime mortgages with voluntary repayment options. Some once you start repayment require payments to continue, but there are providers that will not make you repay the loan every year even if you make a repayment once or twice.
Advantages of Repayment
The main advantage of voluntary repayment options is to lower the overall repayment at the time of death or when the home is sold for a move to a care facility. It also brings an option of inheritance back to the homeowner. By repaying the interest or some of the capital sum there is still value left in the home when it is sold. This value would be given to the beneficiaries, providing of course the home does not depreciate to the amount to be repaid to the provider.
Depending on the provider, once you start repayments you may need to keep making payments. It is the only disadvantage to this type of lifetime mortgage scheme.
Types of Voluntary Repayment
Lump sum, interest-only, and drawdown lifetime mortgages are the main types of lifetime mortgages that have voluntary repayment options from providers. The loans work in the same way as a standard repayment lifetime mortgage with the only difference being you can repay some of the amount owed without penalty. It means if you have a drawdown mortgage you can take more funds out of the cash reserve facility while also making repayments at some point.