Lifetime mortgages often attract negative reactions based on bad press surrounding these products dating back over 20 years. However, following stringent regulation and development, the products now available are far removed from the early offerings in this market. Although these products do still have risks, when appropriate they can be a valuable tool in financial planning.

Lifetime mortgages are the most common type of equity release and they are simply loans secured against a clients’ property. The client continues to live in the property and maintain, run and insure it, with the loan usually repayable when they move into long-term care or upon their death.

Typically, the interest is left to roll up over time increasing the debt owed and reducing the equity left in the property. However, clients may, if they wish, opt to pay all or a percentage of the interest to reduce the effect of the compounding interest.

Most loans are also portable (like standard mortgages) so if a client does decide to move or to downsize and to repay part of the loan any early redemption penalties will been waived in this instance.  Most providers offer guarantees against negative equity so the debt due will be never be greater than the value of the property.

Equity held in property is often a client’s largest single asset and they are increasingly looking to release some of it for a number of reasons:

• not surprising in these times, lump sums are gifted to children to help them get on the property ladder, assist with school fees, soothe financial difficulties, etc.;
• equity release may also help clear an existing mortgage and/or other debts, leaving clients with more disposable income; and
• re-mortgaging existing lifetime loans, typically arranged over five years ago when rates were considerably higher, over 5%.

Even taking into account redemption penalties it was worth re-mortgaging as the rate saving was substantial enough that any penalty would be clawed back within a year, and the rate at which the interest would continue to roll up was significantly reduced.

An example that we have recently seen is where a client required a loan to completely refurbish and future proof a property he had recently bought as this was to now be his forever home.  Another client wished to raise the funds to purchase a holiday home abroad.

With rates at their lowest ever levels (starting at c 2.25%), and with increasingly more products now available offering ever greater flexibility, it is a growing market.

We strongly advise borrowers to seek professional independent financial advice before making a final decision. Our mortgage team is here to help and can be contacted on 020 7444 4030 or by email.

Rebecca Rider
Partner 
rrider@partnerswealthmanagement.co.uk
020 7444 4042

 

The above content does not represent a personal recommendation. Your home is at risk of repossession if you do not maintain mortgage payments.