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Equity Review | October 18, 2017

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Enhanced Lifetime Mortgage

In the world today there are many diseases, disorders, and lifestyle choices that can hinder a person’s health as they age. However, with improvements in medical science, more & more people are now able to live with such ailments & continue to live a normal lives being carefully managed with medication. In fact we are seeing a growth in the elderly population as treatable illnesses extend the life expectancy of both males & females. This has led to a growing number of people needing mobility assistance or other types of financial funding not otherwise provided by the state.

If you have reached a point in your life where you have an illness you can no longer improve, cure, or a lifestyle you won’t change but lack cash to live out your retirement in comfort there is an option. An enhanced lifetime mortgage is a type of equity release for those in ill health. Lifetime mortgage companies will now consider poor health as a measurement of how much equity can be released from your property.

What is Ill Health Lifetime Mortgage?
This type of equity release plan is provided to anyone 55 years or older who meets lender qualifications. Any health disorder including heart disease, cancer, diabetes, high blood pressure, obesity or lifestyle choice like smoking can help you qualify for this impaired lifetime mortgage. It is a lump sum lifetime mortgage in most instances, although one provider also offers a drawdown enhanced lifetime mortgage version also. The difference between a standard lifetime mortgage and enhanced is the maximum lump sum accessed by the process, or if not requiring the maximum release you can now take a lower interest rate than the standard rate provides.

How Enhanced Equity Release Works
A person needs to own their home & be their main residence in England, Scotland, Wales or Northern Ireland. If there is joint ownership, the youngest homeowner must be 55 years old at least. The next qualification is for the home to have a value of at least £60,000 or £70,000 depending on the lender. In order to qualify for enhanced lifetime mortgage, the homeowner needs to fit the health and lifestyle lending criteria. This is determined from a health and lifestyle questionnaire which your independent equity release adviser will help you complete.

Age and health are determiners used to calculate probable life expectancy. Ill health typically means a reduction on life expectancy. Age factors in to the calculation because someone age 55 may live to see a cure or improvement to their condition depending on the illness. The worse their health, the greater the potential maximum release available.

Property value determines the amount of equity available for release. The lender will therefore have a loan-to-value guide for standard terms, which is then tiered to higher LTV’s depending on the severity of the illness. Again, the lender will offer higher equity releases to those in poor health as they will be actuarially assessed to have a shorter life expectancy & hence less roll-up over the long term.

A no-negative equity guarantee required by UK regulatory authorities states the principle balance plus compounding interest cannot exceed the total value of the home. For this reason lending companies have a loan to value (LTV) calculation using age, health, property value, and interest.

Loan to Value Calculation
Interest with most lifetime mortgages is fixed for the life of the loan. With a lump sum equity release it is easy to project possible compounding interest based on current age and home value. The lump sum is only a percentage of 100% of the equity available in the home. A typical lifetime mortgage releases between 24% upto 34% of home equity to someone who is 55 years old. A 70 year old person may see between 39% to 50% of their property value as a tax free lump sum. Enhanced equity release lenders try to increase this LTV percentage to a higher amount.

The rationale is someone in poor health has a shorter life expectancy; therefore, they will die earlier and the outstanding loan will be repaid quicker.

Why Use Enhanced Options?
When examining the calculation and the tax free lump sum determined by the lender, why consider such a product? During retirement there are a lot of expenses to handle. If ill-health forced an early retirement you may not have enough cash on hand to life comfortably let alone pay your monthly expenses. Additionally, for those with extremely poor health & limited timescales remaining may wish to take advantage of the maximum tax free cash now so they can carry out their wishes before the end of time.

The alternative option with enhanced lifetime mortgages is to not take the maximum release, but instead opt for a lower interest rate. Equity release companies such as Aviva will lower their standard interest rate to allow for impaired terms. Therefore, there is still a benefit to gain by claiming the enhancement & obtaining a lower interest rate than would otherwise have been available.

An equity release providing the maximum lump sum amount allowable, over all other lifetime mortgages, ensures you have a comfortable retirement. It is not without risks. There is a potential for the entire home value to be used in the loan after you live a little longer and the interest continues to accrue onto the principle balance.

You may not have funds left in your home to leave to your beneficiaries. It will depend on the fixed interest rate, the maximum tax free cash you take, and how long you live. Repayment of the loan is not due until death, when the home is sold to repay the loan. You may move to a long term care facility, in which case the loan must be repaid.

Overall, during your lifetime and particularly when you are in poor health, there is a solution to your retirement needs. The possible solution is the enhanced lifetime mortgage. One last thing—you do not have to take the maximum lump sum unless you feel it is necessary when completing the process, so always seek advice from an equity release specialist beforehand.