Now that equity release is no longer a foreign term for us, we can start to look at all the different options available for elderly home owners. As you know equity release is done by borrowing from the value of your home. You cease monthly payments on your mortgage if you decide to repay it with any new lifetime mortgage deals.
It can be received as a one off lump sum, or via flexible withdrawals from a reserve facility, or a combination of both. The basic idea remains the same, as elderly couples can receive a capital lump sum and maintain ownership of their property. The only difference is when it comes to paying the loan amount back. This is not paid by the homeowner, but depending on the different equity release deals available, the amount left as an inheritance can differ greatly.
The pros of a lifetime mortgage are as follows:
You maintain ownership of your property; you never pay back more than the value of your home and never do a repayment again.
The cons are:
You will never know the total amount to be repaid, you may be left without an inheritance, you have to be older to be offered more money and interest builds on the loan the longer you live.
Bearing that in mind, there are a few lifetime mortgage deals to look at. Interest only lifetime mortgages allow you to pay off interest monthly and repay the loan amount when the house is sold. With roll-up mortgages the original capital borrowed and the interest that has compounded is paid off once the house is sold.
Beware high interest!
The Typical Mortgage
Fixed repayment plans are when you and the lender agree on a higher amount than the loan. There is no interest and the amount is paid back when the house is sold. The longer you live, the better the deal.
With home income plans you use the lump sum to buy an annuity. The interest automatically gets deducted from the income of that each month. Not suitable if you need a lump sum, the monthly income is small. As with any big decision, make sure you know what options you have. Shop around and decide what works best for you.
You have a reversion product on the market which is different from the lifetime mortgage option. You should not consider a lifetime mortgage, without at least knowing this option exists. Home reversion allows you to sell a part or most of your home to a lender. This lender gives you a certain percentage of your home value based on your life span and home value.
Once you pass on or decide to move to a different location you can sell the remainder of the home. This portion can be used as inheritance or perhaps funds for your new home. In the end the home is sold, but you have money to live on and even an inheritance. The con of this is the home sale, and the advantages are the fact that you live rent free without owing any mortgage payment in the end.
The Deciding Factors
Now that you have consider some of the options that are out there in this short guide it is time to make a few decisions. You will want to calculate the remainder of your life. The mortgage company will do this with lifetime mortgages anyway, so be prepared and honest with yourself. If you have family members who have lived to 100 on one side and those who died around 70 in another you are probably looking at a middle of the road survival rate meaning 85.
Calculate the amount of retirement you already have. Next consider how long that will last and determine if you will still be within the age that you can take out a lifetime mortgage. For certain lifetime mortgage products there is an age limit to how old you need to be or can be in order to access equity release funds. Depending on your pension, annuity, or other financial products you might need to stretch your equity out for 20 or 30 years. Compounding interest during this time could be too much for you to pay in the end. Luckily you do have negative equity clauses and the bank will not allow you to have a mortgage larger than the value of your home; however, you might not get a huge lump sum to live on. Lifetime mortgage deals are perfect for some and not for others.
Our clients are satisfied with their new lives!
National Equity Release Pension Conference, Bath Street, Bakewell, Derbyshire, DE45 1BX.
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