Lifetime Mortgages Explained

The lifetime mortgage scheme is now the most popular form of equity release and can exist in various formats.

In essence, a lifetime mortgage is a secured loan fixed onto your property by way of a first legal charge. The lender in return for taking this charge provides the mortgagor with a tax free lump sum, or a series of ad-hoc withdrawals over time.

Typically from inception, the lender will charge a fix rate of interest on the amount of initially withdrawn as tax free cash. This rate will remain fixed for the duration of the equity release loan, the benefit of this being the certainty of knowing how much interest will be added year-on-year. The end of the plan is determined upon death of the last borrower, or them moving into a long term care facility.

At that point the beneficiaries usually have 12 months in which to repay the equity release company. This is usually via the sale of the property, however in some situations the beneficiaries could retain the house & remortgage for buy to let purposes, or one of the children wishes to retain as their own. The remortgage would raise sufficient funds to clear the equity release lifetime mortgage. If the property is sold, then some of the proceeds will clear the equity release scheme, with the remaining balance passing into the estate & divided accordingly.

Types of Lifetime Mortgage Plans

There are four main types of lifetime mortgages which have evolved for various reasons & to meet the changing needs of the retired generation. these could be for the following reasons: –

  • Lump Sum Lifetime Mortgage – the standard option for when a single lump sum option is required, without any bells and whistles. This provides for retirees with a single objective & no variation on this theme for the future.
  • Drawdown Lifetime Mortgage – provides for an initial capital withdrawal, plus the ability of future ad-hoc payments from a cash reserve facility….read more
  • Interest Only Lifetime Mortgage – facilitates a tax free cash lump sum at inception, with the a mandate to repay the interest charged on a monthly basis….read more
  • Enhanced Lifetime Mortgage – similar in concept to the lump sum lifetime mortgage plan, the enhanced, or impaired equity release scheme considers health as a determinant for the amount that can be borrowed…read more

 

At the same time as deciding on whether flexibility is required in these four schemes, the mortgagor has a decision to make; whether to make repayments of interest, or not. This will determine which type of equity release scheme to proceed with. The choice will be based on both income of the individual(s) and their attitude towards the beneficiaries future inheritance.

Opting for compounding of interest

If the decision is made to make no monthly repayments, either due to affordability or having no regrets about leaving an inheritance, then the roll-up lifetime mortgage could be selected. The effect of a roll-up equity release loan is that the balance will increase annually. This is down to the compounding effect of the interest, which means that each year the interest charged is added to the balance.

The following year, the same event occurs whereby the interest is again charged, however this is calculated on the previous year’s balance, which also includes the previous year’s interest. Effectively therefore, you are being charged interest-on-interest each subsequent year, which is the premise for the term ‘compounding effect’. The majority of equity release loans are completed on a roll-up lifetime mortgage basis. However, as further flexibility beckons, from a retired & upcoming baby boomer generation, then consideration of the interest being charged is now being assessed more carefully.

The compounding of interest, year-on-year would be evidenced by an annual equity release mortgage statement which, like any mortgage statement will clarify the exact position with regards to the interest added that year, and the current state of play with the outstanding balance. Included in any annual equity release statement would be any early repayment charges that would be applicable should the lifetime mortgage scheme be repaid at that point. The current balance, plus this early repayment charge would be the current redemption figure for an early settlement.

Opting for repayment of the interest

Should affordability not be an issue and a good retirement income is available, then the decision to repay: –

    1. a proportion of the interest charged
    2. 100% of the interest charged either monthly, or annually
    3. or even 100% of the interest, plus some of the capital can be made.

 

In the past couple of years equity release diversity has become the foundation for the lifetime mortgage marketplace. With plans from Hodge Lifetime, Stonehaven’s interest select range & more2life’s interest choice plan, more repayment choices are becoming available to the over 55’s. So when the automatic assumption of equity release being an expensive form of borrowing in retirement, these newer, more flexible interest repayment lifetime mortgage schemes are becoming extremely popular.

Taking the first option of at least repaying a proportion of the interest, this will inhibit the roll-up effect to some extent. This will be determined by what percentage of the complete payment is funded by the mortgagor. The higher the percentage of interest repaid is made, the less the roll-up effect of the interest will have. Consequently, the final balance will be lower than if no contributions were made at all. This will appease the beneficiaries as there will be a greater inheritance left than otherwise have been.

The second option which is to repay the whole interest element, results in the original capital balance remaining exactly the same. Therefore, upon eventual repayment of the lifetime mortgage, either on death or moving into long term care, the balance will be the same of when the plan started. Occasionally, if inheritance is a concern to the beneficiaries, they have opted to repay this monthly/annual interest themselves. Protection of their inheritance this way could be an extremely cost effective equity release solution.

Third and finally, we are seeing a need breed of flexible repayment-like innovative equity release loans from the likes of Hodge Lifetime. With the Hodge Lifetime Flexible repayment plans you can repay upto 10% of the original capital borrowed. If this repayment option is fulfilled, and 10% capital repaid, then with interest rates of around 6%pa, you will not only repay the interest but also start chipping away at the capital balance also. Again, clients and their children are increasingly starting to use this option, to manage their equity release balance to a level they feel is warranted for their inheritance.

Now having these repayment options available means more people, who previously were averse to equity release loans, can now feel more assured that their equity can be preserved and protected for future generations.

 

These are lifetime mortgage schemes. To understand their risks and features, always ask for a personalised lifetime mortgage illustration.