An equity release lifetime mortgage is a particular type of mortgage taken out against your home. For more details on what it actually is, click here.
Why do people take out an equity release lifetime mortgage?
Many people in their late 60s and 70s find that they are wealthy with respect to equity stored in the value of their home, but are cash light with respect to available cash that they can spend. An equity release plan provides buyers with ready cash.
This may sound an attractive proposition, but it’s important to be aware of certain considerations.
What should I consider when taking out an equity release lifetime mortgage?
An equity release lifetime mortgage can be more costly than an ordinary mortgage. This is for many reasons. For a start, the policy is not for a pre-defined length, so if you live longer than the term of an ordinary mortgage, a lot more interest will accrue. Plus, if you’re not paying any of the interest off whilst you’re alive, the accumulating sum of the original loan plus the interest can grow quite considerably. Also, the interest rate is often higher. This may be because the rate is fixed from the beginning of the contract, so your lender has to adjust their rate accordingly. They also need to factor in a ‘no negative equity’ guarantee. Both these factors can have an impact on the interest rate they can offer you.
All in all, this means the final sum due when you either die or go into long term care can be substantially more than the original sum of the loan. And you should be aware that this does mean that there may be less for you to pass on to your family as an inheritance.
Early repayment penalties
Early repayment penalties can be expensive, so it’s important you discuss this with your adviser. Please note, however, that they should not apply if you go into long term care.
Alternative uses for the equity
If you release equity from your home, you need to be aware that you may not be able to rely on the property for cash potentially needed later in retirement, e.g. For paying for long term care.
Moving property later
Although loans should be ‘portable’ in theory (ie. you are able to transfer them to a different main residence) your lender still needs to approve the new property before this is possible. If you are hoping to downsize, you may find you fall foul of their loan to property value ratio. I.e. If your lender has a policy not to lend more than 50% of the value of a property, and your proposed property would mean the percentage of the loan would increase above this, they may not accept the new property as security against the lifetime mortgage unless you can pay some of the outstanding loan off. Plus, some types of property, for example sheltered housing, are not always acceptable to lenders because they are difficult to sell in the future.
Loss of means-tested benefits
By releasing some of the equity in your property as cash, you may lose eligibility for certain government benefits such as pension and council tax benefits.
It’s important you check with your adviser what the arrangement fees are before committing to a particular plan.
How do I make sure I’m getting the right financial advice?
It’s important that you get financial advice from an independent financial adviser before you choose to take out a lifetime mortgage. All advisers who a recommend equity release lifetime mortgages must have a specialist qualification. But in addition to checking this, you should also check:
- That they are on the Financial Conduct Authority register (http://www.fca.org.uk/firms/systems-reporting/register)
- That they are a member of the Equity Release Council and are in their directory (http://www.equityreleasecouncil.com/member-directory/)
- That they search the whole of the market to find the right plan for your circumstances
- What their fees are
- What other fees you will have to pay (For example legal fees, valuation fees, set up costs)
- What type of equity release products they can offer
Advisers at Howard Financial Management Limited are qualified to provide advice on lifetime mortgages, so for more detailed information on lifetime mortgages please click here.
This is a lifetime mortgage. To understand the features and risks, ask for a personalised illustration.