Tag Archives: Interest Only Lifetime Mortgage

The Case for Equity Release

Not everyone can qualify for releasing equity from their property, but for those that do it can offer some real financial advantages. The following is going to look at equity release, what it is, how it can help, and what you have to do in order to qualify. Throughout the article you should learn what steps to take and have an educated decision made. If you find it is not the right product for you that is okay because at least you know what is going to work or not for your retirement years.

Qualifying Assessment for Retirees
If you are over 55 and have a property that is worth a fair bit more than you paid for it all those years earlier, then you may have considerable equity that you can use as collateral for a loan. The even better news is that you may never have to repay the loan, because it will be repaid after your demise, by the eventual sale of the property. Ideally you need to have paid off your mortgage or be fairly near to the end of it to make this work, although many equity release companies don’t mind too much if you still have a first mortgage as long as the outstanding debt amount is not too great. They will, in effect, take a second charge against your home, and you can usually receive it as a lump sum which you can use to buy an annuity that gives you an income for life.

Your age is a factor, but there is another area that is considered on the application – your health. Your health is definitely something that can be used to your advantage in retirement when discussing equity release like lifetime mortgages. This is due to the enhanced lifetime mortgage product that is newer to the market.

It allows you to gain a larger lump sum when you have a health issue such as cancer, diabetes, obesity, and other issues that could reduce the longevity you have. You still have the same terms as the main roll up lifetime mortgage; however, the thought is you pay off this loan earlier than someone in good health. In this case poor health can be an advantage.

Income is only a factor if you elect to go with the interest only lifetime mortgage. This type of mortgage requires a monthly payment of interest. Most companies want to ensure that you have disposable income for these payments, but later on if things become too hard with making the payment you can roll over into a lump sum mortgage where the interest starts accruing on the loan.

Another qualifier is the valuation of the property. It has to be enough to make a loan worthwhile for the lender.

Inheritance Issues
It is worth remembering though, that if you take out all the equity in your property now then there will be nothing left for others in the family to inherit. Some would argue that it’s for the children to make their own way in life and that you should enjoy the proceeds of your assets yourself. It is of course, a matter of personal choice, but there is nothing to stop you taking just some of the equity for yourself and still leaving a worthwhile inheritance, depending of course on the amount of disposable equity that you have.

Structuring the Loan to Benefit You
The equity release plan can be structured in a number of slightly differing ways. You can have, for example, what’s called a Lifetime Mortgage where you retain ownership of the property and therefore benefit from any future increase in its value, and you retain the right to live there for the rest of your life without making any repayments on either the capital or interest. Alternatively you can take an interest only mortgage and make regular repayments to cover the cost of the interest on the loan. You can even get flexible mortgages where you can take a lump sum now and further amounts later, within the limits of the total sum agreed.

There may be certain tax implications or loss of state benefits if you take a lump sum through equity release so it is well worth seeking the advice of your accountant or an independent financial advisor, since once you have committed to a contract you cannot easily change your mind. In essence it is simply a case of deciding whether you want “jam today” or “jam tomorrow”. Take a moment to find out if releasing equity from their property is possible for your family.

How Far Has The Lifetime Mortgage Evolved?

The concept of lifetime mortgage to release the equity held in one’s property initially started somewhere in the mid of 1960s. It is based on a simple process to use the value of your property without having to move out of it. These schemes were not as popular then, as they are today because they were neither systematic nor regulated, which gave birth to several poorly devised products called Shared Appreciated Mortgages that made it look like a poor product in those times. Even today, we cannot forget the stigma that still lingers on amongst today’s elderly population in 1990s.

The government understood the need of regulating equity release schemes to provide consumer protection after the sad events that happened in 1990s. There was a need to protect the consumer rights which motivated the introduction of Safe Home Income Plan, abbreviated as SHIP. It laid down certain voluntary measures to be followed by the institutions offering these lifetime mortgage schemes to get their schemes included under the scope and definition of SHIP. Ship has now been superseded by the Equity Release Council (ERC) which lays down the precedents by which all equity release firms & advisers must adhere to.

These new equity release schemes that meet the ERC criteria have to leave the consumer with the right to repay the loan at anytime which secured against the mortgage of the property, if they want, although against some early repayment charges may be levied. It is even mentioned at www.equityrelease2go.com that all the lifetime mortgage plans must have the inclusion of no negative equity guarantee, so that the consumers need not worry about the liabilities stretching beyond the value of the property. With the increasing flexibility and portability, the consumers even got the rights to move to a houses freely and either transfer the equity release scheme or repay it.

All these schemes are today regulated under the guidelines laid down by FSA as well as Equity Release Council. In 2004, the Financial Services Authority fully regulated these schemes as well as the institutions offering these schemes so as to guard the interest of consumers at large all across UK.

Home reversion plans were merged with lifetime mortgages under the guidance of FSA in 2007. Today, these schemes offer greater flexibility to the consumers, enhanced plans for people suffering from several health ailments as well as the options of only paying interests through the interest only lifetime mortgage plan.

Lifetime mortgage schemes have evolved today as one of best products available, in the right place, at the right time to enhance the lifestyle of people even beyond the age of 55.

Do I Sell My Property To The Home Equity Lenders

The answer to this question lies with the type of equity release mortgage has been recommended. For instance with lifetime mortgage, drawdown lifetime mortgage, enhanced lifetime mortgage and interest only lifetime mortgage schemes you will retain 100% ownership of the title to the property.

In these cases the lender, like any residential mortgage lender they will merely place a first legal charge on the property. This protects the equity release provider, in that once the property is sold on death or moving into long term care, the lifetime mortgage provider will have first call on any of the sale proceeds.

However, a different set of rules apply for a home reversion plans.

Due to the mechanics of these schemes, effectively you will only own a fixed percentage of your property. The reason being in that in exchange for the tax free lump sum you require, a portion of the property ownership is transferred to the home reversion company. Therefore, should the provider require 40% ownership in exchange for the tax free lump sum, then you will retain 60% ownership which is guaranteed for your heirs once the house is sold.

All of these plans, however, allow you to remain in your property until you and your partner pass away or move into long term care.

What is Equity Release?

Equity release schemes are vehicles that enable you to release tax free cash that is locked up within your property, which once received can then be spent as you wish. The various UK equity release plans currently available include both lifetime mortgages and home reversion plans. The lifetime mortgage market can be sub-divided into: –

  • Drawdown Lifetime Mortgage

– Roll-up equity release scheme where you are provided with an overall cash reserve facility, but you take only a portion of this initially. Interest is only charged on the money actually withdrawn. Further funds can be taken from the reserve facility at short notice, with no further valuation or set up fees required. Currently the most popular form of equity release scheme.

  • Interest Only Lifetime Mortgage

– Rather than interest rolling up & compounding, an interest only lifetime mortgages plan allows you to repay the interest charged. This protects the equity in the property for your beneficiaries & maintains a level balance.

  • Enhanced Lifetime Mortgage

– A recent innovation whereby upon calculating the maximum equity release possible, certain lenders will take into account medical history as a factor. Should ill-health have proven to have existed, then an enhanced lump sum can be offered by the equity release provider. This will usually be much higher than the normal maximum equity release lump sum available.

An equity release adviser should always be sourced in order to explain all the available equity release plans in full to help you decide which is best suited to your individual circumstances.