There are many different types of equity release schemes. There isn't a 'one scheme fits all'. Therefore, you'll need to know what you want from your scheme. We explain the different types of schemes and the pros and cons of each below.
Gaining necessary funds to live out a comfortable retirement is possible for over 55s. Lifetime mortgage is one product that makes it a little easier for you to access funds currently tied up in property assets like your main residence. There are a few different types of lifetime mortgages available to you. You can choose the type of mortgage that best fits your situation. To understand the characteristics of these loans, it is important to know a few facts including the fact that they are not like traditional mortgages with a monthly repayment.
Lifetime mortgages are setup for repayment after death or a permanent relocation to a care facility. Usually the homeowner's beneficiaries or homeowner will sell the home as a way to get the funds necessary to repay the loan and compounded interest. The home is sold at current market value, so any leftover funds not required for interest and capital repayment are left to the beneficiary. There are two main types of lifetime mortgage to introduce in this article: lump sum and drawdown. All other lifetime mortgage products fit into one or the other of the two categories.
Lump Sum Lifetime Mortgage
Under this lifetime mortgage, a homeowner receives a lump sum of tax free funds. The sum is determined by age and property valuation. Age determines the life expectancy of an individual. Obviously a person who is 55 years of age should have longer to live than someone who is 85. The reason age applies is to determine the length of time interest will accrue. The longer interest has to accrue the larger the eventual repayment will be.
• In easier terms a lifetime mortgage capital sum usually doubles in 10 to 12 years.
The other factor is property valuation. The provider will determine there is enough value in the home to remove equity. The more value a home has the more funds can be released. Some lifetime mortgage companies have a maximum loan amount, while others do not.
Since the loan is set up for the maximum loan to value meaning you receive as much as possible in a capital sum there is usually no chance to remove more funds at a later date. The homeowner receives as much as possible right up front in one payment. This is helpful if that much is needed right away.
Lump sum lifetime mortgages can have variations such as interest only and ill health. Both are discussed on separate pages for the differences they offer as a lump sum lifetime mortgage.
Drawdown Lifetime Mortgage
A drawdown lifetime mortgage is slightly different than the standard lump sum. You still receive an initial lump sum, but there is also a cash reserve facility set up where you can remove additional funds at a later date. The initial lump sum is smaller than the maximum funds available. It can be between £10,000 and £15,000 with most providers. This sum is still tax free and will have compounding interest accruing.
The funds in the cash reserve can be accessed when the homeowner requires more funds. These funds can be withdrawn in £1,000 or £2,000 increments most often. It is the smallest amount the provider allows. The maximum amount is what the homeowner has in the cash reserve facility.
Home reversion is one type of equity release available to homeowners that also differs from lifetime mortgages. A home reversion scheme is not a loan or mortgage. It does not require any repayment even after death or permanent move to an assisted living facility. When a homeowner decides to use home reversion to release equity from their home they are selling part of their property. The entire home can be sold depending on the amount the homeowner requires.
For the sale, the home reversion provider will offer a value percentage. A home is evaluated for its current market value. The age of the youngest homeowner, at least 65 years old, is taken into account. There are life expectancy standards that determine how long the average, healthy adult should live. Using this chart combined with the current market value, a percentage of value is determined. If a person is selling 50% of their home at age 65 they may receive 20% of the value. For example a home worth £100,000, where the homeowner sells 50% at a 20% value calculation would mean the homeowner receives £20,000.
The provider makes money by buying the property for less than the home is worth when the eventual sale occurs. Any portion not sold is given to beneficiaries assuming death occurs. The portion sold plus any appreciation on that portion is the return on investment the company earns.
For some homeowners living rent free, with equity funds is more comfortable than an outstanding mortgage with compounding interest. For others, the thought of selling their home even in part is daunting and worrying. Any homeowner with equity to release from their house can speak with a home reversion specialist to find out further details on the pros and cons. One nice advantage is the remaining unsold portion is guaranteed inheritance for the beneficiary.
Interest only products for retirement are lifetime mortgages. They differ from standard and drawdown lifetime mortgages for the express purpose of offering more options to homeowners who need retirement funding. It can be daunting to accept a loan without making any repayments on the interest or principle sum. To cover homeowners who can afford to make payments and want to keep the capital sum the same throughout the life of the loan, the lifetime mortgage industry created interest only equity releases.
The qualification criteria are the same, except for income approval. Most interest only providers will require an annuity, pension income, or other form of income verification to indicate there is an affordability to repay the monthly interest, which is based on an annual percentage rate. The homeowner can repay anywhere from £25 per month and up of interest. The amount to repay is based on the compounding interest.
Under flexible interest only lifetime mortgages companies have made it possible for the homeowner to choose the amount of their payment. As long as a minimal payment is met the loan is to be repaid at death or when an assisted living facility is needed. There are also new options, which can be found under voluntary repayment plans that include capital and interest repayments even on interest only lifetime mortgages.
For an individual who wishes to leave an inheritance and wants to know the exact amount due at their death or move to a care facility, the interest only lifetime mortgage is an option. It is usually available to take out from for individuals in retirement up to age 75. It is assumed that after 75 a person will not want to make payments nor be able to readily afford them. For this reason some providers put an age limit on qualifying for an interest only mortgage.
A retirement mortgage includes several different products like lifetime mortgages and annuity pensioner mortgages. There are at least four providers of retirement mortgages right now. They offer different rates, which may be variable or fixed, as well as different incentives for homeowners. The difference between retirement mortgages and interest only mortgages is often in the details. For instance a retirement mortgage may require capital and repayment of interest or just interest only. Others may not require a payment, but will not charge a penalty after one year if repayment is made.
Retirement mortgages can also be re-mortgages of an existing 30 year fixed mortgage. The re-mortgage option allows the homeowner to continue making payments but more fitting of their retirement status rather than having to pay off the loan in full.
The point of a retirement mortgage is to continue making payments on the loan, but without the added pressure of a full repayment. As long as a certain amount of the interest is repaid each month, the homeowner is capable of continuing to live in their home without worry of repossession. There are certain companies willing to provide a rollover lifetime mortgage once the owner reaches age 80. In this instance, the owner repays interest or capital/interest from the time they retire to 80. At 80 the mortgage is turned into a lump sum lifetime mortgage where the interest starts to compound onto the loan.
Retirement mortgages are not for everyone. There are drawbacks to each lifetime mortgage, mortgage for pensioners, and retirement mortgages that fit this main category. A homeowner needs to determine if there is an affordability factor that makes the retirement mortgage more appealing than leaving all interest and capital unpaid until the end of their life. Retirement mortgages are beneficial for the right homeowners and should be discussed as an option with an independent equity release adviser.
Ill-health lifetime mortgages are a specialty equity release product for over 55s. Currently the industry allows homeowners to qualify for lifetime mortgage products when they reach 55. Not all lifetime mortgages work the same, so some providers may not start until 60 or 65 years of age. There are also differences in age limits, as some plans are not available as an individual reaches a certain age such as 75. For ill-health lifetime mortgages there are rarely maximum age caps because of the nature of the product.
It is assumed that someone with poor health has a shorter life expectancy than a healthy person of the same age. For this reason, lifetime mortgage providers are willing to increase the maximum loan to value percentage a standard lump sum mortgage has.
The qualifications are slightly different since there is now a factor of health. Age is still going to apply as a determination of life expectancy. A provider has a chart that indicates average life expectancy of a person. The second factor is property valuation. The more value a home has the more equity available for release.
Ill-health can apply to a health condition or lifestyle choice made by the person. For example someone who is a smoker or drinks alcohol frequently may qualify for some of the ill-health lifetime mortgages on the market. A person with heart disease, cancer, obesity, diabetes, and other health conditions that can lower life expectancy can qualify for this type of mortgage. A person with more than one condition may be able to increase the maximum loan to value more than someone who smokes.
The market provides these loans to help those who want to enjoy the life they have left, without financial worries. The loan can increase from a loan to value of 20% at age 60 to 25% at age 60 because there is a health condition (as an example).
Voluntary repayment plans are lifetime mortgages with more flexibility than standard options. These are the newest equity releases to enter the market place. Launched by Hodge Lifetime, voluntary repayment plans became available in 2013. Aviva and Stonehaven soon started offering products that fit under the criteria of voluntary repayment plans, which has changed the market even more.
The more flexible plans ensure those over 55 can find a lifetime mortgage that better fits their needs. There is a chance to improve a retiree's lifestyle with a mortgage that is better suited to their evolving needs as pensions and investment funds are spent.
Voluntary repayment plans started out as a way to increase the versatility of interest only lifetime mortgages. The balance stays level when the interest payment is made. Voluntary repayment plans add to this versatility by making it possible to repay up to 10% of the capital sum without any penalty. Homeowners who wish to start paying a little of their principle balance back can do so with this repayment option, even with a standard roll-up lifetime mortgage.
Usually with a regular lifetime mortgage, the balance doubles every 10-12 years. It reduces the possibility of inheritance. There are also homeowners who find they can afford to repay some of the loan after having it for a few months to five years. Yet, older products prevented repayment unless the homeowner wanted to pay a penalty fee. Voluntary repayment plans take this problem away. As long as no more than 10% of the capital is repaid each year there will be no penalty. If the home value depreciates there is still a chance with this type of mortgage to leave behind an inheritance simply by paying some on the loan. Repayments can be made each month or at random points within the year.