Lifetime Mortgages: Features & Benefits
The overwhelming majority of equity release arrangements are lifetime mortgages. This blog looks at what they are and how they work. I also consider the features of modern plans and look at how they have developed to meet the changing needs of customers.
They are, as the name suggests, mortgages and so the lenders will take a first legal charge on your home. If you already have a mortgage with another lender then this will have to be cleared from the initial drawdown of the lifetime mortgage.
They have no fixed term and so are designed to run for the rest of your life (lives) or until you (or the second of you) goes into long term care.
The Development of Lifetime Mortgages
Early plans were inflexible and expensive. Initially, the agreed advance all had to be taken at outset and the interest being charged by the lender had to be added to the loan.
The single most significant development has been the introduction of the drawdown or reserve facility. A maximum facility is underwritten at outset by reference to the property value and the customers’ ages. Only the amount needed at outset is drawn down and the remainder is a reserve which can be taken later, in instalments. Interest is only charged on these instalments as and when they are taken – much more cost effective than earlier plans.
A further refinement has seen the introduction of plans where customers can pay some or all of the interest which arises. These plans are particularly attractive to borrowers who are uneasy about seeing the debt rise as interest is “rolled up”.
The interest payment options of lifetime mortgages now come with three variations:-
– Interest is “rolled up” – no payments are required and as the lender charges interest so the debt will increase.
– Elective payments – these plans include an option to pay some or all of the interest which arises but there is no contractual obligation to do so. Most plans have limits on what can be paid but the benefit is that some or all of the interest can be paid so as to maintain the debt either at the amount borrowed or, where circumstances permit, to reduce the debt.
– Contractual monthly payments – these arrangements mirror “ordinary” mortgages – the lender will underwrite an application at outset and applicants must be able to prove that they have sufficient income to support the borrowing, throughout the mortgage term. Given the age profile of lifetime mortgage customers, this will usually involve proving sufficient pension income. Because the agreement to make payments is contractual these plans will not have the safeguards referred to in the next section of this blog.
The Equity Release Council is the body responsible for ensuring an orderly equity release market which works for the benefit of borrowers. Lenders offering lifetime mortgages must offer plans that include four specific safeguards, for their plans to be recognised by the Equity Release Council.
– The right to reside – all borrowers must be permitted to reside at the property for the rest of their life (or lives in the event of joint applications).
– The right to move home – the plans must all include the ability for customers to sell and move to an alternative property.
– Separate legal representation – the lender will appoint their own firm of solicitors (and pay for them) and the borrowers will have to appoint and pay for their own firm of solicitors. The intention is that no possible conflict of interest can arise which could be the case if a single firm of solicitors acted both for the lender and for the borrower(s).
– No negative equity guarantee – this ensures that when a property is sold – following death or going into care – a situation will never arise where the debt exceeds the sale price achieved for the property.
Financial advisers operating in this area must have passed an appropriate examination and it is also advisable that prospective borrowers use a firm who are members of the Equity Release Council and who will, therefore, subscribe to their code of conduct.
About our company
Michael Forward Financial Services Ltd are specialist equity release advisers and are members of the Equity Release Council and deal with both lifetime mortgages and home reversions. Further information about lifetime mortgages is available elsewhere on this site.