Lifetime mortgages are a form of equity release scheme that are designed specifically for people over the age of 55. They are intended to suit individuals who are soon to retire, or are already in retirement and therefore able to secure this type of home equity loan plan. Lifetime mortgages can help alleviate the finances of the silver surfer generation and therefore enhance their retirement prospects.
Homeowners do not usually pay any of the principle balance or interest on the lifetime mortgage loan while they are living. However, more recent innovations with lifetime mortgages has led to greater flexibility & the ability to manage the balance via repayments as an option. Newer voluntary repayment plans and interest only plans are part of the lifetime mortgage range that can allow such flexibility.
Despite the simple definition, there are numerous aspects to lifetime mortgages that make them unique. These products are not for every retired homeowner. In general, there are four types of lifetime mortgages, despite the various names used by providers such as voluntary repayment, flexible repayment, retirement mortgages and interest only lifetime mortgages. Most of the products seen on the market fit into the following four categories: roll-up, drawdown, enhanced, and interest only.
Explaining Lifetime Mortgage Categories
To fit lifetime mortgage products to equity release UK client demand, lifetime mortgage providers offer an array of different products. These products can be customised to client needs or fit a specific type of clientele.
Roll-up Equity Release Scheme
A standard lifetime mortgage, the interest rolls-up either monthly or annually onto the principle balance of the loan. There are no repayments made, thus the concept is straight forward; capital is borrowed & rolls up with the compounding of interest for the life of the mortgage. If homeowners take a £15,000 release of equity for the principle balance, in 12 years with interest compounding at 6% AER onto the loan the amount will approximately double to £30,000. At the end of life or a homeowner’s move to assisted living, the entire amount plus all compounded interest is due for repayment.
Drawdown Lifetime Mortgage
The concept of the drawdown equity release is that regular withdrawals can be made from a total cash reserve facility. These can be taken in smaller amounts and remove the need to take all the funds at once which on many occasions is not always best equity release advice. Therefore, if a facility of £50,000 was provided, the homeowner could take an initial lump sum of £10,000, while a total of £40,000 would be left in reserve for future use if required. Homeowners can take additional withdrawals from the account in £1,000 or more increments. The funds withdrawn from the facility and the initial lump sum accrue interest like a roll-up lifetime mortgage. The unused sum in the reserve facility remains interest free unless used and is thus a major advantage of drawdown lifetime mortgage plans.
Enhanced Lifetime Mortgage
Also known as ill-health or impaired equity release, the enhanced lifetime mortgage is for individuals with ailing health or significant lifestyle choices that could lead to health problems. For example, smoking and being overweight can be potential threats to a person’s life expectancy. Diabetes, heart disease, cancer, and other illnesses can reduce a person’s lifetime. An ailing person can take a larger lump sum, a maximum equity release lump sum, to live on. The sum is typically repaid quicker because their life is shorter than the average equity release person.
Interest Only Lifetime Mortgage Product
This is the only lifetime mortgage that does not have compounding interest. The principle balance remains the same as long as the interest is repaid in full each month or in the case of Aviva, Hodge & Stonehaven who all allow more flexible & voluntary repayment options during each year. Some have flexible interest payments starting from £25 per month, as the lowest amount that can be paid towards the interest charged. Any interest not paid is added to the principle, whilst if the whole interest charged results in the equity release balance remaining level throughout the term.
Why Lifetime Mortgages are Popular
There are many advantages to lifetime mortgages. Retirees are suffering from income and cash flow issues. Pensions are smaller as many took a hit due to the two recessions and stock market uncertainty. With no repayments to make and the home to sell for repayment at the time of death, it can be a low risk retirement option for homeowners, providing best equity release advice is obtained. It also ensures there is no struggle during retirement and any dreams and household maintenance issues can be fulfilled.
Pros and Cons of Lifetime Mortgages
The home will need to be sold to repay the loan, unless there is a significant amount of money from a life insurance policy available. Inheritance funds can also be lost due to compounding interest that requires the full home sale to repay interest and principle amount.
The cons are fairly significant as it can be the loss of a family home or beneficiaries’ inheritance. However, the pros are extensive. Cash from any equity release is tax free as it’s classed as a withdrawal of capital from the property. Equity release can be used as the homeowner wishes. Inheritance can be paid out during their lifetime should a child or grandchild suffer financially. For example, the homeowner can help their child buy their first home or send a grandchild to university. It is possible to use the money for property repairs, a once in a lifetime holiday, or to enjoy retirement without any cash worries.
There is a no negative equity guarantee so no other asset, beyond the home, can be claimed by the provider. This protection ensures nothing goes wrong for heirs after their family member dies and they cannot end up owing the equity release provider any more than the value of the home.
Beyond being more comfortable in retirement, homeowners have the option of choosing the product that best fits their needs. They can decide to include an inheritance protection guarantee, customise a loan to suit their financial situation, or find a product that already fits. With choices, tax free cash, and potential flexible repayment, there is little to lose when choosing a lifetime mortgage to finance a homeowner’s retirement.