Four categories exist for lifetime mortgage schemes: roll-up, drawdown, interest only, and enhanced. As a homeowner you have the right to choose which lifetime mortgage will work for you based on the benefits of each. There are some common benefits between the four products. One is the repayment of the capital sum is required only at death or when you need an assisted living facility for the remainder of your life. Second, you have access to tax free cash based on the equity in your home and the age of the youngest applicant. Third, companies have different qualifications for the different categories of schemes with incentives to compare. Fourth, these products are designed for retirement, thus age and property value factor into the loan to value percentage you receive.
An In-depth Look at Lifetime Schemes
With different scheme types it is best to look at highlights for each of them and then talk about certain points with more depth.
• Roll-up schemes: the simplest lump sum lifetime mortgage with a standard loan to value percentage dependent upon the lender. The equity release interest rate is fixed and compounds either monthly or yearly onto the capital sum received during the lending process.
• Enhanced Lifetime Mortgage: known as ill health or impaired health equity release. This form of lifetime mortgage loan has a larger lump sum based on an enhanced loan to value percentage due to a homeowner’s ill health. The interest is still fixed and compounds monthly or yearly; however, health issues increase the amount awarded. Therefore, the greater the severity in health, the higher the maximum equity release calculation will be.
• Interest Only Lifetime Mortgage: this is another initial lump sum product, but monthly repayments are made on the interest. Any interest accrued for the month is paid off, leaving the capital sum the same as the amount on the loan completion day. Great for those looking to preserve the equity in their property.
• Drawdown Lifetime Mortgage: this is a smaller initial lump sum with a cash reserve facility to boost the overall future lending plans. While the sum is smaller upfront, there is a reserve of cash to be used as the homeowner needs it. The interest is fixed for the initial sum and compounds annually or monthly. Additional withdrawals may have a different fixed interest rates based on the rate at the time of withdrawal. Interest only accrues on the portion of funds withdrawn from the account and not the maximum available in the reserve facility.
Clearly there are benefits to each type of loan, based on the exact features that separate them into four different categories. All lifetime loans work on certain principles like the loan to value percentage set by age, health and property value. There are also minimum withdrawal amounts which start at £10,000 and may be as much as £25,000 dependent upon the equity release company. The minimum lump sum amount is the amount homeowners must take to complete the equity release loan process.
All equity release loans fall under Financial Conduct Authority regulations and Equity Release Council Code of Conduct. The regulations for these loans require a no negative equity clause to keep the loan from reaching over the home value as interest accrues. This provides added protection for the children, who will be safe in the knowledge that they can never end up owing more than the value of the property.
Qualifying Parameters for Plans
Qualifications are nearly the same on each loan. Age is going to be a minimum of 55 for the youngest homeowner. There are certain lenders who require ages of 60 or even a minimum of 70 before they offer retirement lifetime schemes.
Along with age requirements there are property value stipulations. A home has to value at £60,000 for a few of the schemes. Many lenders have increased the minimum value to £70,000 and there are a few that require even more. A few of the lenders require £75,000 and at least one wants to see a minimum of £100,000 in property value. Please check with the equity release team first.
Qualifications also exist for health. The enhanced version of lifetime mortgages requires a health and lifestyle questionnaire to be completed. This will assess the extent of the ill-health upon which the lenders underwriters will calculate the risk.
Inheritance Protection and Incentives
Lifetime schemes have additional features that may benefit homeowners. For example several companies offer free valuations, cashbacks and flexible repayment options. Flexible repayments from the likes of Aviva & Hodge Lifetime allow for 10% of the loan to be repaid each year. Homeowners do not have to make the payments, but if they do make voluntary contributions it prevents the loan from increasing. The voluntary repayment option also negates the early repayment fee typically charged.
A reason to make repayments if possible is inheritance. The more interest accruing onto the capital sum, the less remains for heirs. Inheritance protection clause is one way to ensure there is a little left from the house sale for the heirs. With these various options lifetime mortgage schemes may fit your retirement plans using the flexibility of their features.