Equity release through a lifetime mortgage is an increasingly popular way for some people to release funds to allow them to be more financially comfortable in later life, improve their homes, or open up the bank of mum and dad to help children onto the property ladder.
Erin Denness, Head of the Residential Property team and equity release mortgage specialist at Hughes Solicitors in Heathfield, explains how lifetime mortgages work, the risks of taking out a lifetime mortgage and issues for you to consider.
What is a lifetime mortgage?
An equity release or lifetime mortgage is a mortgage that is not repaid on the usual monthly basis.
You will usually need to be at least 55 years old (60 for some lenders) to be eligible for a lifetime mortgage. If it is a joint application, the age of the youngest person is considered.
You must own your own home to get a lifetime mortgage and it has to be your main residence. Some providers require your home to be worth a certain amount and may also specify a minimum loan amount.
How does a lifetime mortgage work?
Just as with a standard mortgage, when you take out a lifetime mortgage, you retain the ownership of the property. The equity release provider will secure the lifetime mortgage by taking a legal charge over your property. The charge will be registered against your property’s title at the Land Registry. This secures the repayment of the whole of the loan (with interest) when the property is sold.
Interest on your loan is usually charged at a fixed rate for the duration of your loan (ie until the loan is repaid). Interest is charged on a compound interest basis which means that instead of only paying interest on the loan amount, you also pay it on the interest that is added to the loan amount. This means that the amount you owe grows at a much faster rate compared to simple interest.
Moving house
It is possible to move house if you have a lifetime mortgage and keep the equity that has been released. Before you move though, you need to inform your lender who will need to ensure that your new property meets their lending criteria and is adequate security for your loan – for example, a property of a similar value.
If your new home does not meet your lender’s criteria and you still want to move, you may have to repay some or all of your lifetime mortgage together with the interest. You are likely to have to pay an early repayment charge as well. Some lenders, do however, offer downsizing protection which would allow you to move into a lower value home and pay off your loan without an early repayment penalty.
Risks of a lifetime mortgage
The main risk of a lifetime mortgage is that the amount needed to repay your lifetime mortgage (including the compound interest) may leave little or no proceeds from the sale of your home. This, of course, would affect the inheritance you can pass on to your loved ones.
Normally, you will not need to worry about having to pay out more than your home is worth as most providers now offer a ‘no-negative-equity guarantee’, meaning the money you owe will not exceed the sale value of your property. It still means, however, that the property’s entire value would have to go towards paying off the mortgage.
You may pay off a lifetime mortgage early (i.e. during your lifetime) however this will attract an early repayment charge. Most lenders will let you pay off a portion of the loan each year without incurring a penalty.
If you need to move into long term residential care, you will need to pay off your lifetime mortgage. This usually necessitates the sale of your home. An early repayment charge does not usually apply in these circumstances.
The amount of state or other benefits to which you may be entitled can be affected by any funds released through a lifetime mortgage. You should carefully consider the implications for you with your independent financial advisor.
There can be a number of costs involved in taking out a lifetime mortgage, including arrangement fees, survey and valuation fees, legal fees, financial advice fees and a completion fee (which is paid to the lender to cover any residual costs associated with administering your mortgage).
Death and lifetime mortgages
If you die and your spouse is also on the mortgage, they can carry on living in the property and will be solely responsible for repaying the loan. If you have no spouse or if your spouse dies or moves into long term residential care, the lifetime mortgage will need to be repaid. This is usually through the sale of your home.
There is usually a 6-12 month time scale for repayment of the lifetime mortgage following the death of the borrower(s).
Independent financial advice
When considering obtaining a lifetime mortgage it is vital that you see the advice of a suitably qualified financial adviser.
All financial advisers offering equity release advice should be regulated by the Financial Conduct Authority. They will advise you whether equity release is suitable for you and help you find the product which best suits your needs.
The fees they charge vary considerably. Some will charge a fixed fee, others will charge a percentage. The amount you pay will often vary depending on whether you are given the more costly ‘whole of market advice’ (unrestricted access to lenders) or the ‘cheaper tied advice’ (restricted access to products from one lender).
Update your will and lasting power of attorney
Taking out a lifetime mortgage may require you to make amendments to your will. If your will bequeaths particular sums of money to beneficiaries based on the value of your home, it may be necessary to change your will because there may not be enough money in the estate to fulfil the cash bequests once the property is sold and the lifetime mortgage redeemed.
You are not legally required to have a lasting power of attorney when taking out a lifetime mortgage but the Equity Release Council recommends that you do so, not least because your named attorney can arrange an equity release drawdown on your behalf if you lose mental capacity.
If you do not have a property and financial affairs lasting power of attorney in place, if you have not taken the maximum lifetime mortgage drawdown and more equity needs to be released to pay for your care, an application would need to be made to the Court of Protection. This can be costly and leave access to any drawdown facility suspended until the court hears your case.
How can we help?
All lifetime mortgage lenders will require you to seek independent legal advice regarding the legal implications of your lifetime mortgage. We are fully qualified to advise you in this respect.
We will be pleased to review your lender’s requirements before meeting you in person to discuss these with you in detail.
We also have dedicated Private Client team who will be able to assist with your wills and lasting powers of attorney.
For further information and advice please do contact us