9 Things You Might Not Know About Lifetime Mortgages
Introduction
This blog considers some less well known facts about lifetime mortgages. I also give some examples of how lifetime mortgage plan features can be put to practical use.
1. Reserve/Drawdown
Most lenders now offer plans where a total loan amount can be agreed at outset but where customers do not have to take the whole amount at once. There are two main benefits. Firstly interest is only charged on further amounts as and when they are taken and, secondly, these amounts will generally be available without further underwriting and with no need for a new advice process.
2. Property Purchase
By far the largest number of lifetime mortgages arranged are secured on properties already owned by the applicant customers. However a lifetime mortgage can also be used where a property is being purchased. I provide an example in the following section.
3. Divorce and Separation
A fact of modern life is the increasing number of “silver splitters”. More customers are divorcing and separating in later life.
Consider the following example. A married couple each aged 70 decide to separate and agree that the proceeds from the sale of their £500,000 unencumbered property will be shared equally. On the face of it each party is then looking to buy a property for £250,000, ignoring other assets. In fact a 70 year old could borrow up to 40% of a new property’s value. So they could each purchase a new home for up to £416,000 with the help of a suitable lifetime mortgage not, £250,000.
4. Making Mortgage Payments
All lifetime mortgages include a facility whereby borrowers can make payments either monthly or on an ad-hoc basis. The usual maximum amount in each year is 10% of the amount borrowed each year. These payments can be made without incurring an early repayment charge. So, as one example, borrowers could elect to pay an amount each month which equates to the interest being charged on the loan and so the debt remains constant and more equity in the property is preserved.
See my note below in the section concerning mortgage underwriting.
5. Repaying an Existing Mortgage
Many older customers are reaching the end of the term of their existing mortgage arrangement, set up on an interest only basis, but with no means of repaying the capital sum outstanding. In many cases they will be unable to extend the term of their existing mortgage either because of their ages or because they have insufficient income to service a new loan.
A lifetime mortgage can be set up to “take out” the existing mortgage and remove the need for the capital outstanding to be cleared.
6. Estate Planning
Lifetime mortgages are increasingly being used to supplement retirement income in a way which preserves other assets. Notably this includes pension funds where there might be sound reasons for preserving an asset which would normally pass outside of an estate by reducing the net value of a property asset which might otherwise be subject to Inheritance Tax.
7. Mortgage Underwriting
In the section above concerning making monthly or ad hoc payments it is important
to distinguish between an “ordinary” mortgage where payments are contractual and a lifetime mortgage where they are voluntary. Because of this a lender will not carry out an affordability assessment.
In addition, because there are no contractual payments required, lenders are much more forgiving about lending to clients who may have had an adverse credit history.
8. Safeguards
There is no disguising the fact that lifetime mortgage products have had a chequered past and it is important to distinguish between those which were formerly offered and those which are available today. The two main products which caused problems originally – share appreciation mortgages and home income plans – are no longer available.
Safe Home Income Plans (SHIP) was launched in 1991 and was superseded by the Equity Release Council in 2013. All plans now have four safeguards:-
- The right to reside for life.
- The right to move.
- A no negative equity guarantee.
- Separate legal representation.
9. Equity Release Council
As mentioned in the section above the Equity Release Council is the voluntary trade body and all lenders and many advisers will be members. Lenders must commit to offering certain product features and advisers have to observe a code of practice.
Those wishing to apply for a lifetime mortgage should make sure that the adviser being used is a member of the council. There is a “Find an adviser” facility on the Equity Release Council website – www.equityreleasecouncil.com.
Further information is also available on our website – www.michaelforward.co.uk Click on the “Our services” section of the menu bar at the top of the front page and from the drop-down menu click on lifetime mortgages.
For more information contact:
Heidi Spencer heidi@michaelforward.co.uk 07851 836 362
Michael Forward michael@michaelforward.co.uk01604 635 435