What is a lifetime mortgage?
A lifetime mortgage is similar to most other residential mortgages. However there are some very important differences:
- A lifetime mortgage does not have to be repaid within a certain term, it can literally run for your lifetime.
- You can choose whether to meet the interest charged each month on the loan, but you do not have to pay anything back on a monthly basis if you do not wish to or cannot afford to. Any interest you do not pay simply gets added on to the total loan each month, so the debt grows.
- You can start to pay the interest and switch to not paying the interest later if desired. However, you cannot then switch back again.
- The amount you can borrow is based on your age at the start of the plan, the property value, and in some cases your medical history.
- You do not have to borrow the maximum available. It is possible to take a lower amount initially (typically £10,000) and then take further ‘drawdowns’ at any time in the future, up to a pre-set limit.
- You can be sure of leaving something for beneficiaries by using an ‘inheritance guarantee’ option. In this way some of the property value is ring-fenced against being eaten away by the rising debt on a roll-up plan. However this would reduce the maximum facility available to you.
- The property is normally sold and the plan paid off if you die, enter long term care or move home.
What protection do you get?
All lifetime mortgage advice and lending is regulated by the Financial Conduct Authority (FCA).
Furthermore, in 1991 an organisation called ‘Safe Home Income Plans’ (‘SHIP’) was set up. This organisation provided a set of guarantees for equity release applicants. The guarantees have now been incorporated in to the Equity Release Council’s code of conduct for lenders and are still in force today. They include:
- Borrowers will never lose their home or be repossessed whilst they continue to live in it – they have the right of occupancy for life.
- You will never owe more than the property is worth, no matter how long you stay in your home (and with a loan that is much less than the maximum possible, or if you pay the mortgage interest each month, this is very unlikely). This is a ‘no negative equity’ guarantee (see below).
- You will never have to make a penny in repayments if you don’t want to.
- The right to move home at any time and take some or all of the outstanding mortgage with you is guaranteed. This is subject to the lenders terms and conditions.
- The Solicitor of your choice can be used to give you legal advice regarding the plan.
You therefore have a high degree of security with this type of borrowing which is not the case with normal residential mortgages.
Do you already have to own your home to get a lifetime mortgage?
No you don’t! Equity Release or a lifetime mortgage can be used to buy a property to live in. This means the equity you already have from any property you have sold, or other existing savings, can be the deposit, with a lifetime mortgage making up the rest of the purchase price. This can enable you to buy a more expensive home than you could have afforded with just your sale proceeds or savings.
How much can you borrow?
The total loan amount available will depend on your age at the time of arranging the scheme, and in some cases, your health. The older you are then the less time there will be for the debt to rise significantly, and so you can borrow more.
There is usually no difference in the amount you can raise whether you are a man or a woman. 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 your life expectancy is shortened then some lenders may consider lending you more. This is because they can statistically expect the loan to be repaid more quickly than normal.
For approximations of how much you might be able to borrow, please see our Lifetime Mortgage Calculator page.
Protecting some of the equity for beneficiaries
You can guarantee that at least some of your home value is left to children or beneficiaries when you die. Some schemes allow you to protect a given proportion of the initial value. For example, if you protected 20% of the value of your home, then the rolling-up debt would never exceed 80% 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 20% of the net sale proceeds.`
Protecting say 20% of the equity in this way means the maximum you can borrow is 20% lower than it would have been.
If you do not borrow the maximum possible on day one, you can add a ‘drawdown reserve’ to the plan. This allows you further amounts later, usually in sums of £2,000 or more. These are available on around two weeks notice, without the need for a solicitor or adviser.
The size of the drawdown reserve can affect the interest rate charged – the higher the reserve, the higher the rate.
Bigger lump sums for people with ill health – Enhanced lifetime mortgages
If you have retired due to ill health, you have a medical condition, are overweight or smoke, you may qualify for an ‘enhanced lifetime mortgage’. These provide bigger lump sums than would be paid to someone who is expected to live longer.
These loans often come with a higher interest rate than non-enhanced lifetime loans. Additionally, taking out a bigger loan in not always the best thing to do. The eventual total cost of the loan plus interest will be even higher.
Can you still move home?
You can always move, and take the balance of the plan to your next home on the same terms. If you trade down, you may need to pay some of the debt off. The next home will need to be acceptable to the lender.
Early repayment charges
The design and funding of products means lenders do not expect their money back early. Repayment is only required on death, if you enter long term care or you move.
If you find yourself in a position to repay the loan earlier than this, a penalty may become payable. This will depend on the length of time the plan has been in force and the type of calculation used.
These charges have arguably been the most contentious aspect of lifetime mortgages in the past. Some deals taken out years ago have resulted in very high charges when borrowers have tried to repay them. Consequently, today’s products spell out very clearly how, when and how much penalty may be charged if you pay the plan off early.
There are two methods of calculation for early repayment charges. One is a fixed percentage of the loan for a set number of years. The other is linked to movements in the price of financial instruments called ‘Gilts’. You need to understand how both work if you are considering taking out a plan, especially if you may have the means to pay it back early.
No ‘negative equity’ guarantee
Many prospective lifetime mortgage clients are concerned their family may have to pay any shortfall when they die. However, this can never happen due to the ‘SHIP’ no-negative equity guarantee. This means that the lender can only ever take as a maximum the full property value, no more. However, this would only happen if the debt had risen to reach the value. This in turn would be affected by whether property prices had fallen significantly, or you live to an old age and you have taken a lifetime mortgage at a relatively high rate of interest.
All advisers need to be professionally qualified specifically in Equity Release.
The choice of scheme needs to be tailored to your needs, and choice of features and research can be complex. Andy Wilson has many years experience of advising equity release clients and is happy to meet you to discuss your particular requirements in your own home. Fees are payable ONLY if you decide you want to apply for a plan.
We are proud Adviser Members of the Equity Release Council.