Lifetime Mortgages account for almost all Equity Release plans.
A Lifetime Mortgage is similar in principle to a standard mortgage, with the main difference being that there are normally no monthly repayments to make and the loan (plus the monthly interest owed) is redeemed when the final planholder dies, or moves into long-term care. The schemes are generally set up on the basis that – for the life of the loan – the interest rate is either fixed (at the time you take out a tranche of money), or at a capped variable interest rate.
Furthermore, as an increasing number of lenders enter the marketplace this has brought about new features and flexibili- ties, enabling you to opt for products that are better tailored to your own specific needs.
What’s the maximum I could raise?
This is largely dependent on the age of the youngest planholder and value of the home. As a rough guide there are differing percentages from aged 55 upwards. Broadly, it’s 25% of the property value aged 60, 35% aged 70, 45% aged 80 and 55% aged 90+.
However, if you have an unhealthy lifestyle (such as smoking), or face ill-health, then some ‘enhanced’ plans may allow you to receive a larger percentage than the standard age breakdowns – as the insurer assumes that you may not live as long.
Although you’re not penalised if you then go on and beat the odds!
Should I take all the money at once, or when I need it?
You can do either. Instead of opting for the full lump-sum at the outset, drawdown allows you to take up to the agreed amount as and when you require it.
Drawdown is the most popular route and around 76% of all lifetime plans are currently set up this way.* The effect of this approach is that it may enable you to stay within limits for means-tested benefits. It would also lessen the impact of the ‘rolling-up’ of the interest, as some of the loan would not have been drawn down. However, do remember that the interest rate applicable when you draw-down further funds may be at a different amount. Additionally, perhaps consider products that guarantee the drawdown facility, so that you’ll know it won’t be an issue whenever you come to act.
What’s a typical plan?
Lump-sum lifetime mortgages tend to raise around a third of the value of the home, and amount to about £101,000.
For drawdown, the average amount initially taken is around £63,500, with a further £36,000 or so available to draw down over time. In total, that’s about 27% of the property’s value.*
What is Roll-Up?
If you don’t make monthly payments to pay off the interest, then the interest owed is added to the capital that you originally borrowed.
To gauge the impact of ‘roll-up’, if the interest rate for the lifetime mortgage loan is 5.5%, for example, a £50,000 lump-sum loan (with the added interest) would have doubled to around £100,000 after 13 years. In some cases, and if you’re able to, the option exists to pay off some (or all) of the interest. The benefit of this approach is that you’ll lessen the amount owing, and limit (or avoid entirely) the roll-up effect. Additionally, with certain plans, there is also the opportunity to pay off some of the capital – without incurring a financial penalty.
In some instances, it will be family members, such as the children, who may help pay off any interest/capital, as they are the ones who are likely to benefit further down the line when it comes to the inheritance.
What happens if I want to cancel the plan?
In much the same way as a standard mortgage, there may be an Early Repayment Charge against certain timescales – the terms of which would vary across the providers.
Are there other equity release plans?
Home Reversion, which accounts for less than 1% of the marketplace is the other option. Unlike a lifetime mortgage, where you retain a full share in your home, in this scenario you sell all or part of your home, thereby giving up at the outset all or part of the ownership.
As Equity Release is a complex area, it’s essential that you take advice, so do get in touch to find out more.
(Source: *Equity Release Council, Spring 2018 Market Report, 2nd Half 2017 data)