Early repayment charges

Our plans are designed to last for the rest of your client's life so an Early Repayment Charge (ERC) may be payable in certain circumstances.

  • The loan may be repaid in full at any time
  • Partial repayments may also be made, providing there is a minimum loan balance of £10,000 remaining

There will be no Early Repayment Charge in the following circumstances:

  • If the long-term interest rate at the time of repayment, is the same as, or higher than the rate on which the mortgage is based.
  • Your clients sells their property and transfer their mortgage to another property.
  • Your client (or the last surviving borrower) is moving into long term care.
  • When repayment takes place after their death (or the death of the last borrower)
  • The estimated term of the mortgage has expired.
Early Repayment Charge Calculation

Rules

The ERC charge will:

  • Never be greater than 25% of the total of:
    • the lump sum
    • and the completion fee:
  • Apply for the estimated term of the mortgage (as quoted in the KFI and offer letter).
How an ERC is calculated for a full repayment

(Please note that if the long-term interest rate has increased, an ERC is not payable).

An example

  • long-term interest rate on which the mortgage is based = 3.66%
  • long-term interest rate ruling at date of repayment = 3.16%
  • Original term of the mortgage = 30 years
  • Year of repayment = 20th year
  • Initial loan size = £40,000
  • The balance of the loan on the day they repay = £120,000

3 Factors used in the calculation


Factor 1

The difference between the long-term interest rate on which the mortgage is based and the rate ruling at the date of requesting repayment

3.66% - 3.16% = 0.5%

Factor 2

The estimated time (i.e. term) remaining on your client's mortgage on the date they repay

30 years - 20 years = 10 years

Factor 3

The balance on the mortgage on the day they repay (including all interest and charges)

= £120,000

The Calculation

Factor 1 x Factor 2 x Factor 3 = TOTAL ERC payable OR 25% of the Lump Sum and the completion fee, whichever is lower + Redemption Fee

0.5% X 10 X £120,000 = £6000
= £6000 ERC payable which is less than 25% of the lump sum and the completion fee (£10,595) + £200

How an ERC is calculated for a partial repayment

(Please note that if the long-term interest rate has increased, an ERC is not payable).

At the time your client decides to make a partial repayment of this Lifetime Mortgage, any ERC due is calculated in the same way as above, but Factor 3 will be based on the total amount that they repay, rather than the balance on the mortgage.

The long-term Interest Rate (Factor 1)

The long-term interest rate used for the basis of the calculation (Factor 1) is the FTSE UK 20 year gilt yield index, as published daily in the Financial Times. This long-term interest rate is used as it provides more stability than the Bank of England rates and is less prone to fluctuation. Go to ft.com to find the latest rates.

Why we calculate ERC's the way we do

When working out the ERC's we use as fair as possible an approach to work out any loss to us, at the time your client repays. The ERC's are designed to cover any loss that we incur when we have to unravel the long-term funding we obtained at the time the loan was made. If the long-term interest rates are the same or higher than what they were when the client took out the loan, we don't charge the client an ERC.

A further example

The following example demonstrates the actual amounts that your client may pay (excluding the redemption fee) if they repay the whole amount. The example is based on 2 people who were aged 70 and 75 when they took out a £20,000 loan. Based on their life expectancies the estimated term of the loan was 20 years, and the long-term interest rate at the time was 3.66%.

Year of repayment
(end of year) 		Outstanding balance Actual cash amount that your client might pay
Reduction in interest rate
3% 2% 1% 0%
1 £21,284 £5,000 £5,000 £4,044 £0
14 £47,802 £5,000 £5,000 £2,868 £0
20 £69,442 £0 £0 £0 £0
Maximum ERC payable: £5,000

For partial repayments – at the time your client decides to make a partial repayment on this Lifetime Mortgage, an ERC will be calculated in the same way as above, but this time will be based on the total amount that your client repays.

For Interest Select, partial repayments are allocated between the two parts of the mortgage (if applicable) in proportion to the outstanding balances at the time of repayment.