When you first start out in retirement you may have made provision for extra income via pensions. With inflation and longer life expectancies, you may not have enough savings. There may be expenses you unfortunately haven’t accounted for such as helping with child care expenses, assisting the children with a deposit to buy their first home etc. The lifetime mortgage can help bridge these expenses & help fund the unexpected in retirement. There are several types of lifetime equity release mortgages that can help retirees get the financial security they need.
So What is a Lifetime Mortgage?
Lifetime mortgage schemes are a type of secured loan. Repayment is not made each month to repay interest and the principle loan amount like standard mortgages. Homeowners repay the equity release loan upon death or move to a long term care facility. In most instances the funds to pay off the loan are from the house sale.
The home is not necessarily required for repayment, but often it is the only option due to the compounding interest. Life insurance plans that pay out when death occurs may be an option to cover the loan. Beneficiaries would have a choice to use those funds to keep the home or sell the home to have more funds for the funeral and their own inheritance.
Types of Lifetime Mortgage Loans
Lump Sum or Roll-Up: commonly referred to as roll-up lifetime mortgages. This simple option provides a lump sum of tax free cash to the homeowner. There is usually no need for any further funds, thus they tend to be a one-off transaction. The interest charged is usually charged monthly or annually &1 compounds onto the principle of the loan and is repaid in full at the end of the loan term.
Drawdown Lifetime Mortgage: the lender calculates a maximum overall facility which the homeowner then takes an initial lump sum from. The untaken cash is then kept by the lender in a cash reserve facility which is then made available future withdrawals whenever the homeowner requires. The facility contains the additional funds released as part of the maximum loan to value percentage, or the homeowner’s request, whichever is the lesser value. Interest compounds only on the funds removed from the facility and not the total amount available for release. There is potential inheritance protection built into the loan based on the amount homeowners actually use versus what is available.
Ill-Health or Enhanced Lifetime Mortgages: are usually provided as a maximum equity release lump sum mortgage. It is designed to help individuals with health and lifestyle impairments by offering them a larger lump sum than standard schemes would provide. Illnesses that would qualify for enhancement would be Parkinson’s disease, cancer, high blood pressure, obesity, diabetes, or heart disease. These & even being a smoker or just being on mediation can help qualify a homeowner for a larger maximum lump sum than the standard roll-up mortgage.
Interest Only Lifetime Mortgage: the three equity release loans mentioned previously have no repayment during the life of the loan. An interest only lifetime mortgage is different. There is a monthly interest repayment required. As long as the full interest amount is paid, the capital balance remains unchanged and level throughout the period of the loan. Like the drawdown option this builds a little inheritance protection on the remainder of the equity. There are flexible options allowing a homeowner to rollover their interest only mortgage into a roll-up loan if it becomes difficult to repay the interest each month.
How Lifetime Equity Release Mortgage Works
Homeowners will need to compare equity release schemes based on their needs and potential interest accrual on the principle sum. To qualify the youngest homeowner must be 55 years of age and most lenders have an upper age limit, although some like Aviva has no upper cap. The homeowner then decides how much tax free cash they require & then apply for the specified amount which is then lent as a secured loan. The main advantage of the lifetime mortgage is that the homeowner retains 100% of the property value.
Property value is another qualification. Homeowners need at least £60,000 in property value. There are some schemes that require a minimum of £70,000, which is why comparisons are important, so please contact us first. Equity Release schemes can only be offered if the property is in the UK, although only a couple of lenders will offer a loan in Northern Ireland.
A loan to value percentage (LTV) is determined by the equity release company. The LTV percentage is a reduced maximum equity amount from the actual value of the home. The younger the applicant, the lower the amount that can be released. Conversely, the older the applicant, the higher they can release which is all based on life expectancy.
LTV’s usually start at around 15% of the property value at the age of 55 & can go upto a maximum of 53% by the time anyone reaches the age of 85. It is therefore important to be able to gauge the maximum equity release which can always be obtained by using an online equity release calculator from any of the leading websites in this market.