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Life- time loans and Equity Release Mortgages

Life- time loans and Equity Release Mortgages

 

What is Equity?

 

Equity is calculated by taking the value of the property and deducting any outstanding mortgage or charge. What is left is your equity i.e. that part of the property you own outright.

What is Equity release?

Releasing the equity in your own home means that you can obtain a cash lump sum or series of payments, tax free, by granting a charge over your property to the lender.

There are two main types of equity release:

 

Lifetime Mortgages and Home Reversion plans, both types are regulated by the Financial Conduct Authority (FCA).

 

  • Lifetime Mortgages

 

A Lifetime Mortgage is a type of mortgage where you may choose to take your equity in a single lump sum, or as an initial cash lump sum with a cash reserve from which you can draw on later, up to the maximum limit pre-agreed with the lender. You retain full ownership of your home at all times.

 

Depending on the plan you choose, interest on the loan can be paid monthly or rolled up to be paid when the property is sold. The loan plus the interest is then repaid by your estate when you die or move to permanent long term care. If you are part of a couple, the repayment is not made until the last person living in the home either dies or moves to long term care. In other words, both you and your partner are free to live in your home for the rest of your lives.

 

You may choose to retain some of the value of your property to provide an inheritance for your family.

 

With some plans you can choose to pay off the monthly interest either in full or in part keeping the debt to the amount borrowed.

 

 

  • Home Reversion Plan

 

A Home Reversion plan also allows you to access all or part of your equity while retaining the right to remain living in your home rent free. With Home Reversion, the lender will buy all or a part percentage of your home. This means that the lender will own all or an agreed percentage of your home.

 

When the property is sold the sale proceeds are shared according to proportions of ownership. This means that if your property increases in value the lender will benefit from the increased value of your home.

The lender provides you with a tax free cash lump sum (or regular payments) and a lifetime lease back of the property to you guaranteeing that you and any co-owner may live in your property rent free for the rest of your life or until you move into permanent care.

 

How much cash can I release in my property?

This depends on your age and the value of your property. The sum released to you may also depend on your medical condition.

 

Releasing the Equity in your home

A life time loan or Equity Release mortgage enables you to access the equity in your property thus enabling you to take the cash from your property in return granting a life time mortgage to the lender.

Following retirement it is difficult, sometimes impossible, to mortgage or re-mortgage your property because mainstream lenders will not grant you a mortgage that extends beyond the age of 75. This can pose a huge problem to retired home owners who still have large mortgages to repay, particularly where the mortgage has been an interest only mortgage.

Equity release and life-time loans can solve this problem and more and more products are becoming available in the mortgage market place.

What can I use Equity release funds for?

There is no restriction on what you can use the cash you raise against your property for. Equity Release can be used to clear outstanding mortgages or debts, home improvements, or just to raise funds for that long promised cruise or new car.

How does Equity Release work?

You will receive an agreed sum of money either as a lump sum or as a series of payments depending on the type of loan you choose.

You have the right to remain in your own home as long as you choose or until you die or move permanently into residential care.  Generally you also have the right to sell the property and move home either repaying the mortgage or taking it with you to a pre-approved property.

Do I qualify for an Equity Release/Lifetime Mortgage?

  • You must be over 55 to qualify for an equity release mortgage – and this applies to all persons on the deeds.
  • You must be resident in the UK.
  • Most lenders require that your property is worth a minimum of £70,000.

Where can I obtain an Equity release mortgage?

Equity release mortgages or life time loans should only be sold by qualified Financial Services Authority (FSA) registered advisors. See useful information below.

What are the Benefits of Equity Release?

  • You retain 100% ownership of your property
  • No monthly repayments
  • No negative equity – you can never end up owing more than the value of the property.
  • Continue to live in your home rent free for the rest of your life
  • The cash you receive is tax free
  • Avoid the moving costs of down-sizing and remain in your own home

What are the Pitfalls of Equity Release?

 

  • Taking cash from your property reduces the sum you can leave to loved ones when you die
  • You must repay any existing mortgage or loan on the property before you can access your equity
  • The property must be your main residence
  • Interest will accumulate each year on a compound basis, meaning that interest is charged each year on the amount of the loan as well as interest accrued in previous years.  The more years that pass before the loan is eventually repaid, the bigger the final total interest charge.  The total loan plus accrued interest is repaid from the proceeds of the sale of your property when you die or if you move permanently into long term care. This means that you will have less money to pay for private residential care.
  • If you choose a single cash lump sum at the start, the amount you owe can grow quickly.  If you take smaller sums over time the amount you owe will grow more slowly.
  • There is always a risk that property prices may fall, or not increase enough to repay the loan plus interest when the property is sold. If that happened your estate would be left with a debt to pay.  To ensure this doesn’t happen you need to ensure that you choose a mortgage that provides a ‘no negative equity guarantee’, meaning that the repayment amount won’t exceed the sale proceeds of your property.  So, even if property prices go down, you or your estate will never owe more than the amount realised on the sale of your house.
  • Releasing cash in your home may affect your right to state benefits, care in your home and care in a residential home which are assessed on the cash you have in the bank.

 

 

 

Equity release and Lifetime mortgages are complex and it is vitally important to understand the Terms and Conditions so you will need a solicitor who can provide you with expert legal advice.  CMS can provide you with a competitive, all inclusive quote from solicitors with experience in this type of mortgage.  Please call us on 01638 576478 or e mail customerservice@cms-uk.co.uk.  We will be happy to discuss your requirements and provide you with a free legal quote.

 

Useful Information:

 

You will be able to find more information regarding where to obtain an equity release or life time mortgage from any of the organisations below.

 

http://www.saga.co.uk/money/equity-release

 

http://www.whichequityrelease.co.uk

 

http://www.equityreleasecouncil.com/home/