Equity release is available as a lifetime mortgage or a home reversion plan. In this guide we focus on the different types of lifetime mortgage that are available. A lifetime mortgage is used to release cash tied up in the equity of your home. This cash is tax-free, and you can continue to live in your home until you go into long term care or die. Your property is sold at this point to pay back the balance accrued on the lifetime mortgage.
Interest is charged on a lifetime mortgage and this rolls up over time. This means that interest is not only added to the original amount borrowed but also to the interest already accrued. This increases the debt and over time it can grow to a sizeable amount. Lifetime mortgages that adhere to Equity Release Council standards offer no negative equity protection to help make sure that you never borrow more than your property is worth.
Lifetime mortgages can come as interest-only, drawdown or flexible, enhanced and protected. We explain more about these below.
An interest only lifetime mortgage allows you to make monthly interest repayments and is suitable for those that can afford to make monthly repayments but cannot get a traditional mortgage in retirement. Depending on the plan you choose you can pay-off all or some of your monthly interest charge on the amount you have borrowed. If you do this from the start of your lifetime mortgage and pay off the interest in full each month your debt will not increase beyond the amount originally borrowed. If you decide to pay some of the interest back each month your debt will increase but at a slower rate than compared to not making any payments at all. By paying off the interest charged on your lifetime mortgage you can avoid this interest cost ‘rolling up’ and retain as much of the share of equity in your home as is possible. This helps to maximise the amount you can leave behind to your beneficiaries.
There are numerous equity release lenders that offer interest only lifetime mortgages. Not all lenders offer their lifetime mortgages directly to the public so you may need to find an equity release adviser to help you.
You can choose how much you want to repay towards interest costs each month. However, this amount must meet the lender’s terms and conditions. No formal affordability tests are required for this type of lifetime mortgage, but you should consider with your equity release adviser how much is reasonable for you to pay each month, any changes to your income or expenditure in the future, the value of the inheritance you want to leave behind and the size of your lifetime mortgage loan.
No, it is not required for borrowers choosing an interest-only lifetime mortgage to pass an affordability test.
Interest rates for lifetime mortgages have in general been reducing over the past decade. You should speak with your equity release adviser to find out the best rates available to you when taking an interest only lifetime mortgage. In addition, some lifetime mortgage lenders offer personalised rates based on each borrower’s circumstances.
A drawdown lifetime mortgage allows you to release cash from your home as and when you need it rather than in a lump sum. You will receive an initial lump sum and the lender will also agree to a cash facility that you can then release money from in the future. This can be when required or as a regular payment.
Drawdown lifetime mortgages can be more cost effective than a standard lifetime mortgage because the interest is only applied and rolled up on the cash withdrawn. This means the interest grows at slower rate compared to interest rolling up on a larger sum taken in one go.
A drawdown lifetime mortgage works in the same way as a standard lifetime mortgage, allowing you to release cash from your home, receive this tax-free and remain living in your own home. Your lifetime mortgage lender will agree the maximum amount you can borrow, and this will depend on your age, health and the value of your property. You will receive an initial lump sum with the remaining amount you could borrow held in a cash facility. You can then access this cash facility when required. Interest is only added to the money you have received and not the whole amount you could borrow. The drawdown lifetime mortgage is repaid when you go into long-term care or pass away.
If you are making a joint application the age of the younger borrowerwill be used for the basis of the maximum loan to value available to you. Your health and the value of your property are also considerations when calculating how much you will be able to borrow from the lender.
Go to the equity release calculator provided by HUB Financial Solutions and see how much money you could release from your home.
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This is a generic term usually for lifetime mortgages (a type of equity release) that have flexible features such as being able to draw down cash when required and being able to make interest repayments.
This is an interest only lifetime mortgage that allows you to change your monthly repayments. If you need to stop making repayments all together then you can switch to a standard lifetime mortgage. Interest will then roll up and your debt will increase.
Enhanced lifetime mortgages are for those with medical conditions that have the potential to reduce their lifespan. The lender will make more money available in this case than compared to someone with the same circumstances but without the health issues.
A protected lifetime mortgage allows you to guarantee the percentage of your home your beneficiaries will inherit. You can ring fence this percentage but it will also reduce the maximum amount you can borrow.
Those needing a mortgage in retirement can consider a retirement interest only mortgage or a secured loan. These are suitable for those that can pass an affordability test and are happy to make monthly repayments and do not want to give away any equity in their home. Retirement interest only mortgages only pay back the interest costs and not the original amount borrowed, while a secured loan repays both. For both of these options borrowers should be aware that if they fail to keep up interest payments their home is at risk of repossession.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.