We receive a LOT of calls about properties where there are outstanding mortgages/equity release/lifetime mortgages etc so we asked our colleague Simon Dexter to put together an overview of these areas as we are not competent or insured to talk to our callers about what can end up being quite complex financial situations. These topics tend to be related to paying for care so it is very important that people understand their options and how decisions can affect future care plans…
Equity Release Mortgages
Author: Simon Dexter, Director at SPF Private Clients
Equity Release Mortgages have been available for many years now, and in a number of forms.
It is fair to say that some of the historic products did not afford the borrower the protection that they deserved. These days, tighter regulation has rightly ensured that there are appropriate protections in place for consumers and having seen the market evolve significantly, we as a firm decided to start offering these products to our clients in 2019.
At SPF Private Clients (SPF), we look holistically at our clients’ requirements and objectives and will consider all forms of residential mortgage lending when making a recommendation. These days, there are a number of lenders who offer standard mortgages, where interest payments are made each month, for clients well into their eighties, and sometimes beyond. However, not everyone wants to make a monthly payment and for this situation, a Lifetime Mortgage allows for interest charged to be added to the loan.
We also consider and point out a number of alternatives to borrowing money such as downsizing, renting out a room, or using other assets to name but a few. Every situation is unique and requires discussion and careful consideration. Our key aim for each client engagement is to provide clear and concise information, allowing our clients to make informed decisions which will be supported by our advice, guidance and tailored recommendations.
There are two types of Equity Release Products, as defined by our regulator, the Financial Conduct Authority, and these are:
- Lifetime Mortgages
- Home Reversion Plans
We will discuss each of these in more detail below.
Lifetime Mortgages:
The most common form of Later Life Lending is a Lifetime Mortgage. Lifetime mortgages are available to borrowers aged 55 and over and provide a sum of money secured against the borrower’s home via first legal charge, in the same manner as a conventional mortgage.
Borrows can take a lump sum which is drawn the day the mortgage starts. The interest rate is fixed for life and the borrower has full control of those funds from the moment they hit their bank account. Excess funds not being used can be put in a deposit account to earn interest. In addition to this, a client can also create what is known as a Drawdown Facility. This facility allows a pre-agreed amount to be in reserve which can then be drawn down, as and when required. The benefit of taking a drawdown facility is that funds not drawn are not charged interest. Interest is only charged once funds have been drawn from the facility. However, the lender does not guarantee that the funds will be available to the borrower, so our clients quite often take both a lump sum and the drawdown facility to balance the cost of the interest on funds required and the certainty of access to the money when needed.
Lifetime Mortgages can be used for many purposes and on the fun side, money raised might be used to:
- Travel more
- Buy a classic car, or perhaps
- To purchase a second home in the UK or abroad
Other Common Reasons Include:
- To ultimately stay in a home that the owner might otherwise not be able to afford
- Topping-up a low income in retirement
- Fund care in a client’s home and/or make alterations to allow them to remain there
- Gifts, perhaps to children or grandchildren for deposits on a property
- Spending money for those who do not wish to leave a financial legacy or property assets to anyone
- Inheritance tax planning – funds can be released and gifted to children or other beneficiaries, creating a debt in the estate
- To assist with the purchase a new home
- Clients who are divorcing later in life where one wants to buy the other partner out
- Repayment of an interest only mortgage that is coming to the end of its term, avoiding the need to downsize
We can act for clients, or their attorneys should that be required.
Interest rates are fixed for life and borrowers can choose not to make any payments at all. Instead, interest charged is added to the loan then repaid when the borrower (or last borrower for joint applications) dies or moves permanently into care. In this instance, the total debt, including interest, gradually grows over the period the loan is held which will impact on the amount left to any beneficiaries. Interest rates change all the time but at an example rate of 6 per cent, the debt would double in around 12 years if all interest was added and no payments were made.
As the interest added to the loan is compounded (interest charged on both the loan amount drawn, plus interest accrued to date) our clients can reduce or eliminate the effects of the debt increasing by making payments to the mortgage. At the time of writing, most Lifetime Mortgage lenders allow their clients to make a voluntary overpayment of up to 10 per cent each year of the amount drawn, but as I say, this is entirely optional.
Lifetime Mortgage loan sizes and interest rates are based on the borrower’s age and the value of the subject property. As they are not assessed against income or affordability, this means that people on a low income, or even with no income, can still potentially take this type of mortgage. It is ‘asset-based lending’.
It is important to note that those who take out a Lifetime Mortgage would not be entitled to take a Deferred Payment Agreement (DPA). A DPA is an arrangement with a local council that allows an owner to delay paying for long-term care home costs, which are usually secured by a charge on the property. Entitlement to other means-tested State Benefits can also be impacted by taking a Lifetime Mortgage as the money held on a bank account can potentially mean that the benefit is no longer payable.
Alternative Finance Options:
It is essential that all alternatives are considered when establishing the most suitable solution and these may include:
Mainstream Residential Mortgages:
As mentioned, an increasing number of lenders are willing to offer conventional mortgage terms to older borrowers and SPF’s expert advisers are able to investigate these options on the borrower’s behalf.
Retirement Interest Only Mortgages:
These products allow you to borrow a lump sum secured against your home, pay monthly interest on the loan and repay the debt when the borrower (or last borrower for joint applications) dies or moves permanently into care. These mortgages are assessed against retirement income and in the case of joint applications, each individual must be able to demonstrate affordability on their own. However, we can quite often get better options than these by using standard mortgage terms from a specialist provider, the key difference being that these will have a defined end date.
Home Reversion Plans:
We do not offer these plans but in essence, they allow the homeowner to sell a percentage or all of their property at below market value and live there rent free until they move into care or die. At this point the home is sold and the reversion company gets its share (or all) of the proceeds.
Other Important Information:
SPF offers Lifetime Mortgages and Retirement Interest Only Mortgages from the full range available to mortgage intermediaries through an experienced team of expert advisers. Whether you are looking to repay an existing mortgage or seeking to release funds for personal use, tax planning purposes or to assist family members, SPF can assess your circumstances and advise on the most suitable option.
SPF’s commitment is to provide clear, impartial advice and to deliver a first-class service both during the mortgage application process and after the mortgage has completed. In short, we provide a full advice, guidance and management service to those who wish to proceed with us.
SPF are members of the Equity Release Council and are authorised and regulated by the Financial Conduct Authority (FCA).
We only advise on Lifetime Mortgage products which fully meet the Equity Release Council’s Product Standards. These mortgages are required to feature a “no negative equity guarantee” which put simply, means that you, or more specifically your estate, will never owe more than the property is worth when it is sold. Any residual funds remaining after the debt plus interest have been repaid, are transferred to the owner, or after death, their estate.
Find out more:
Should you have any further questions or would like to discuss your borrowing options in more detail, please contact Simon Dexter on 07968 553 337 or at sdexter@spf.co.uk.
A lifetime mortgage will be secured against your home.
We may charge a fee for the advice we provide; this fee will be dependent upon your personal circumstances and will be agreed with you after we have fully understood your requirements. Any fee is payable upon successful completion of your mortgage, unless agreed otherwise. We may also receive commission from the lender.
SPF Private Clients Limited is authorised and regulated by the Financial Conduct Authority (FCA). The FCA does not regulate some forms of buy-to-let mortgages.
