Lifetime mortgages vary in type, terms and conditions based on the equity release company lending the money. Lifetime mortgage companies are competitive providing four basic types of equity releases to individuals 55 years or over, and who own their property. The types are: lump sum, enhanced, drawdown, and interest only.
1. Lump Sum Lifetime Mortgage – is a one-time pay-out of equity release, which compounds interest until the homeowner dies or moves into long term care. Additional funds could be made available in the future; however this would be subject to a fresh valuation & possibly further set up costs. It would also depend on the balance of the plan at the time & the age of the youngest homeowner. An equity release calculation would then determine whether any further funds could be made available. This could be subject to a minimum release of £5,000, but does vary between lenders so check first.
2. Enhanced Lifetime Mortgage – can potentially provide a larger maximum equity release lump sum payment with interest accruing for the life of the loan. To qualify for an impaired equity release plan it needs to be shown that either ill health persists now, or has done in the past & will be noted on that person’s medical records as proof. It is based on the homeowner being ill or making lifestyle choices that will lower life expectancy. The more sever the conditions, the potentially greater the lump sum can become. Enhancement can now also come in the form of a reduced interest rate as a consequence of proving impairment.
3. Drawdown Equity Release Schemes – are a facility style equity release plan in which the homeowner is offered an overall cash resource. From this amount the homeowner can then decide upon how much they wish to take as an initial lump sum. The remaining funds unused are held in the cash reserve facility where they sit until needed in the future. Access to this cash can be in as smaller amounts as £1,000 a time & usually incur no further costs when taken. Interest only accrues on the amount of funds withdrawn from the facility and this is the reason why they are the preferred choice of the majority of equity release schemes.
4. Interest-only lifetime mortgages – offer a lump sum payment in which the homeowner thereafter makes a monthly interest payment to repay the interest generated on the principle loan amount. The outstanding loan amount remains constant; due to the interest being repaid in full each month. This prevents the loan from becoming larger than the home value as well as leaves funds available for inheritance. This is the main advantage of lifetime mortgage interest only schemes as the beneficiaries will have a known final balance to repay. They can even partake in managing the monthly payments themselves in situations where they may have benefitted themselves from the initial lump sum taken, such as property purchase.
How Lifetime Mortgages Work
Lifetime mortgages work based on their type as defined above. A company will assess the homeowner’s needs first. A homeowner may need tax free cash for retirement expenses like utilities, food, petrol etc. The homeowner may also want extra cash for special holidays or a second home purchase.
Once the reason for the funds is known, a company can help the homeowner determine the correct type of lifetime equity release scheme. Someone who potentially needs expenses on a regular basis can use a drawdown facility to ensure their money lasts through retirement. A person in poor health can take advantage of lifetime mortgages by having more capital available while they are living rather than letting it sitting unused.
Overall, the company needs to look at the age of the person, value of the home, health, and interest rate to determine a loan-to-value percentage. This loan-to-value or LTV percentage is the maximum amount of money a lender feels comfortable giving to the retired homeowner based on their personal criteria.
A lifetime mortgage is governed by Financial Conduct Authority Rules and the Equity Release Council Code of Conduct of which there are five, one of these being the no-negative equity clause in the agreement. This clause prevents the lump sum plus the compounding interest to add up to more than the home value. Companies have to calculate conservatively to ensure depreciation and longer life expectancy is taken into account before releasing funds. The higher the home is valued, the more that can be released in a lump sum or drawdown mortgage.
Borrowers can also request an inheritance guarantee. This clause limits a certain percentage of home value from being part of the lifetime mortgage calculation. It is a percentage given to beneficiaries when the home is sold as part of the repayment.
Features of Lifetime Equity Releases
• Lump sum of cash or drawdown facility
• Tax free funds
• Repayment due at death or move to care facility
• Roll-up or monthly repayment options
• Inheritance guarantee options
• No-negative equity clause
• Fixed rate of interest for life
Homeowners need to qualify for lifetime equity releases under these specifications:
• Youngest homeowner is 55 years or older
• Home value is £60,000 or £70,000 – minimum value based on equity release company
• Ill-health – if the youngest homeowner is in poor health the lump sum can be increased
• 100% ownership of the property
• There must be little or no mortgage home -unless it can be paid off with the lump sum from the lifetime equity release
Lifetime mortgages provide an option for homeowners to get cash funds when their retirement funds are drying up. The amount award is dependent on the qualifications where the youngest homeowner is the main factor in calculating the awarded amount. They provide the flexibility within its ranks as there are many platforms to suit individual needs.