Over half a dozen UK financial companies sell several lifetime mortgage and equity release products. One of those products is the lump sum mortgage. It is a standard lifetime mortgage from which all other products have evolved. It is characterised as an equity release for homeowner’s over 55 years of age who are cash poor, but property rich.
Lump sum equity releases are everything the name implies—the homeowner receives a lump sum of cash to use during their retirement years. They were the formative equity release plan where sometimes their inflexibility proved expensive for customers in the long run before the invention of the drawdown equity release schemes. However, for those people knowing they only need a single lump sum only they provide a simple release of equity solution.
How Lump Sum Equity Release Schemes Work
Lump sum equity release is awarded as a percentage of the home’s value. This percentage or loan to value amount is based on the health, age, property value, and amount the homeowner needs.
The homeowner’s age determines the life expectancy calculation of the homeowner. Someone 55 is typically going to live longer than someone who is 75 in terms of how long the lifetime mortgage will be outstanding. The loan-to-value is based on the life expectancy thereupon.
Repayment for the equity release is not due until death or a move to long-term care. If jointly held the last surviving homeowner will need to repay the loan plus interest that accrues either at death or their move to long-term care.
Ill-health can increase the lump sum amount based on a shorter life expectancy for the homeowner. This would be following completion of a health & lifestyle questionnaire.
The calculation also looks at the property value. A home worth £350,000 has more equity than one worth £150,000 assuming no secured loans exist. The homeowner may have a specific lump sum amount they require for their retirement years. This means a comparison of lump sum products is required to determine which company can provide the amount the homeowner is looking for.
The lifetime mortgage company is going to try to arrive at the lump sum amount the homeowner needs, but qualifications and home value will determine the ultimate maximum equity release amount available.
Additionally, the Financial Conduct Authority regulates all lifetime mortgage companies. In addition, the trade body governing the equity release industry requires a no-negative equity clause to be present for all equity releases. It prevents the lender from taking any more than 100% of the home value upon eventual repayment of the mortgage.
The calculation examines age, property value, and determines the compounding fixed interest rate. The fixed APR (annual percentage rate) accrues onto the loan until repayment. This means the borrowed lump sum plus APR determines the amount of repayment, thus the calculation has to factor in the total based on life expectancy and ensuring the total repayment is not more than the current home value.
Also homeowners can include an inheritance guarantee. The guarantee protects a percentage of the home from being used in the lump sum calculation, as well as the maximum lump sum amount provided to the homeowner.
Features of Lump Sum Mortgage
• It is a singular lump sum release of equity payment
• Cash is tax free in the hands of the homeowner
• The funds can be used on any expense the homeowner desires
• There is a fixed interest rate which stretches the length of the mortgage term
• Roll-up, interest only & enhanced version options may apply
• No-negative equity clause as standard
• Inheritance guarantee can be added with certain schemes
Qualification of Lump Sum Plans Required
The youngest homeowners need to be 55 years or older to access a lump sum equity release. The minimum home value varies from company to company, but generally starts at £60,000 or £70,000. A health and lifetime questionnaire is filled out by the homeowner to determine if the maximum lump sum can be increased due to ill health.
If the home is jointly owned, the youngest homeowner still needs to be 55 years of age. If ill-health is a factor it only counts for the younger of the two homeowners. A lifetime mortgage UK is available in England, Wales, Scotland & Northern Ireland.