Lifetime mortgages (often known as equity release) are loans that are taken out by people who are age fifty five or older. The loans are secured on their house and typically, no payments are made. The loan is allowed to accumulate, but the borrower can continue to occupy their house for as long as they live. Interest is added to the original loan on a regular basis and then the capital and interest is repaid on the sale of the house.
Equity release has been around for many years in one form or another but until recently has had a chequered history. The early attempts at equity release involved people selling a part, or all of their property at a discounted rate, or relying upon an investment product to pay an interest only mortgage and also generate an income. Unfortunately, both of these types of schemes favoured the lenders and sellers of these plans more than the consumer in many cases and eventually these plans are either no longer offered or are a niche product.
Having learnt from their earlier mistakes, lenders have gradually moved towards consumer friendly products and have developed the lifetime mortgages which are described above. They allow borrowers to have more control as they retain ownership of the property and do not rely upon investment products to pay the mortgage. Most products now have a no negative equity guarantee which means that if the amount of the loan exceeds the value of the property they will not pursue the next of kin for the difference. In practice, as most lenders would only lend a seventy year old 30% of the value of their property, it is unlikely that negative equity would appear unless we had a completely static housing market for many years to come with no house price inflation.
So although much positive work has been done on lifetime mortgages, I have often thought that for many the inability to make payments is a drawback. For example, many pensioners have a need for cash but have enough surplus income each month to potentially service a loan or perhaps their children feel that they could service the loan by paying the interest on the loan.
Hodge Lifetime Mortgages have plugged this gap with two innovative plans. The first is called the flexible lifetime mortgage and allows people to raise money in the usual way but differs from the other loans by allowing the borrower to pay off 10% of the original loan each year without penalties, and these payments can be paid in two instalments over the year if needed. The second scheme differs from all other lifetime mortgages as it does demand a payment each month and it is known as the retirement mortgage. The maximum amount you can borrow is 50% of the value of the property, but affordability has to be demonstrated. Another feature of this loan is that once the youngest applicant on the mortgage turns age eighty the mortgage can be converted if you wish to a rolling up lifetime plan with no further payments needed.
These two new schemes are innovative and tick a few more boxes on the road to the perfect equity release mortgage in that people can borrow more and keep their loan at the same level they started with, or even reduce the loan. Also, the interest rates are relatively competitive, but as always a warning that these plans are not for everyone and independent financial advice should be sought before entering into any contract.
Kieron Bassett Financial Services has two Independent Financial Advisers who specialise in mortgages and investment advice. Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or visit www.kieronbassett.com.
Kieron Bassett DipPFS
25th November 2013
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