Capital release plan providers will be required to allow new borrowers to make repayments without penalty to reduce the size of their loans
Capital release plan providers will be required to allow new borrowers to make repayments without penalty in order to reduce the size of their loans.
The requirement, set by the Equity Release Council which oversees standards across the market, is being introduced from the end of March – and will apply to all new plan sales.
The move is aimed at making the plans more attractive – and avoiding criticism that they remain too expensive. Purchased by those over 55, capital release plans allow borrowers to take out a loan against the value of their home without having to pay monthly interest.
New requirement: capital release plans allow borrowers to take out a loan against the value of their home without having to pay monthly interest
Instead, interest – usually set at a fixed rate – accumulates in the loan, increasing in size over time. The debt is usually paid off when the owner dies or requires long-term care.
The new requirement for borrowers to repay part of their loan is the fifth ‘standard’ the council has imposed on lenders who offer capital release.
Big players include Aviva, LV, Legal & General, More2Life and construction company Nationwide.
Other key standards include the crucial guarantee that debt accrued 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 he needs treatment.
Although the new standard only applies to loans purchased after March 28, many providers are already allowing existing borrowers to make payments without penalty, although there is usually a cap on the amount of payments made.
Jim Boyd, chief executive of the council, says the new standard reflects 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 income later in life or enter into an inheritance.