As the name suggests these schemes are mortgages secured on a property, but designed to run for the life of the holder, so there is no fixed term by which time the loan must be repaid. Full repayment of the loan is only required if you (or the last of you to leave if there are joint borrowers) permanently vacate the property for any reason, or die.
The loan can be in the form of a single lump sum or ad-hoc drawdowns of smaller lump sums. Interest is only charged on the amounts actually released to you.
Interest is added to the loan monthly or yearly, but you are not required to make any repayments during your lifetime. The eventual debt, including rolled-up interest, is repaid from the sale proceeds when the house is sold. Any surplus from the sale goes to your assets or estate.
Interest Paid Schemes
A recent variation on this type of mortgage allows borrowers to meet some or all of the monthly interest payments. In this way, the debt can either remain constant if all of the interest is paid, or the rate of debt increase can be slowed down if only part of the charge is met. These types of equity release plans are particularly useful for those people who are reaching retirement with an existing ‘interest-only’ mortgage but for which they do not have a vehicle to repay the loan. They can transfer the debt to a lifetime arrangement and never have to worry about a fixed repayment date. Additionally, if the repayments become unaffordable (for example if one of a couple dies and their income dies with them) the loan can instantly be switched to a ‘roll-up’ of interest fro that point, again for life.
Please note: it is sometimes possible to get a ‘normal’ interest-only mortgage from a number of mainstream or High Street lenders, although their availability is fast reducing. However these mortgages come with a fixed term by which time the debt must be repaid. Do not confuse these with proper ‘equity release’ schemes which comply with the SHIP requirements; these instead guarantee that the loans can run for life and not for a fixed term. Also, the ‘no-negative equity’ guarantee does not apply; you cannot protect any of the equity and you do not have the right of occupancy for life – if you fail to keep up the payments on the mortgage your home could be taken from you.
How much can you borrow?
The total loan amount available will depend on your age(s) at the time of arranging the scheme, and also the property value as assessed by a qualified valuer acting for the lender. The older you are then the less time there will be for the debt to rise significantly, and hence the greater the loan facility offered at outset. There is usually no difference in the amount you can raise whether you are a man or a woman but if there are two of you the loan is based on the age of the youngest. In some cases, your state of health can be taken into account. If you suffer with or have suffered from a life limiting illness, and your life expectancy is shortened then some lenders may consider allowing you to take a larger loan than would otherwise be available, as they can statistically expect the loan to be repaid more quickly than normal.
Protecting some of the equity for beneficiries
If you wish to guarantee that at least some part of your home value is left to children or beneficiaries then some schemes allow you to protect a given proportion of the initial value. For example, if you protected 10% of the value of your home, then the total debt would never exceed 90% of the value at any time in the future. When you leave the property and it is sold, you or your estate will get at least 10% of the net sale proceeds.
The total debt, with interest, can rise quickly. However the rate of increase is linked to the interest rate charged on the plan, and this in turn is linked to how much of the available funds you actually need to borrow. A lower than maximum loan will attract a lower rate of interest, currently around 4%. A loan close to or at the maximum available will attract a higher interest rate, currently between 6%-7%. At these typical interest rates the debt on a single lump sum scheme will roughly double in ten years (for the high rate) and 17 years (for the lower rate).
If house prices also fall, then the percentage of the property value that is accounted for by the lifetime mortgage may rise very quickly and the debt could eventually grow to reach the value. This shows the benefit of a ‘no negative equity’ guarantee offered on ‘SHIP’ qualifying plans and means that once the debt reaches the value of the property it will grow no further. The debt will stay level with the value but all of the equity will have gone. Clearly, the lenders do not want this to happen as they can then charge no more interest, and is why they are quite conservative on how much they will lend in the first place given your age(s) and property value to try and ensure the debt does not reach the value before you leave the property.
The choice of scheme needs to be tailored to your needs, and choice of features and research can be complex. Please contact Andy Wilson to discuss your particular requirements, who can then arrange to meet you for a no-obligation chat at Andy’s expense.