Mortgages for over 55's

Finding financial breathing space in your home

  • Pay off debts or your existing mortgage to free up some of your income
  • Help your grandchildren with education costs
  • Help the children with a deposit for their first house
  • Simply free up cash to enjoy life’s little (or big) luxuries
  • Make gifts now to reduce the inheritance bill later

Key Information

Equity Release
Equity release is a term used to describe the action of raising money from your home without the need to move out of it.
There are two main types of scheme in use at present:

Lifetime Mortgages
This is a loan secured on the home to provide either a lump sum or regular monies at specific intervals.

The homeowner continues to own the title deed and the mortgage lender simply places a first charge on the property to secure their financial interest on sale.

As these mortgages are generally utilised to provide much needed funds, the compulsion to repay interest on the loan or repay the capital is normally waived.  Instead, the interest due is added to the loan on a monthly basis, called a ‘roll-up’ mortgage.

This means that the loan increases by the amount of interest owed on a monthly basis.  The compound effect means that the mortgage debt increases each and every month until the mortgage is eventually repaid from the sale of the property.

If the mortgage remains on the property for a number of years, the final mortgage outstanding including the accrued interest could leave little or no remaining funds for your beneficiaries.

The rate of interest is normally fixed from outset and can remain fixed for the life of the mortgage.

Home Reversions
The fundamental difference is that with this option you sell all or part of your home for a capital sum or regular income.

To secure your right to live in the property, a lease is created so that you can remain in the property for the rest of your life, or until you move permanently into a care home or sheltered accommodation.

Safe Home Income Plans (SHIP)
Lenders adhering to SHIP standards, guarantee the following:
Security of Tenure: You have the right to remain in your home for the rest of your lives.
Portability: You can move property without adversely affecting the benefits of the loan.

Legal Advice
It is imperative that you take independent legal advice before signing any offers.  Most lenders will insist on this and SHIP members will also insist that the solicitor completes a certificate to acknowledge that all essential features and implications of the chosen plan have been brought to your attention.

Valuation
The amount you can borrow normally depends on your age – a fixed percentage of the property value is available determined by your age at completion
The lender will instruct their own valuer, who will report back their findings to the lender.  As the amount of loan offered is dependent it is important to consider getting independent valuations so that you have a clearer expectation.  Most estate agents can provide comparable figures to keep costs down.

Maintaining the Property
The lender does retain a financial interest in the property and will insist that a robust type of buildings insurance policy is in place.
Secondly, they are likely to reserve the right to carry out inspections to make sure the property does not fall into dis-repair.  If they feel that repairs need to be made, they can insist they are carried out, or employ their own contractors to do the work and add the cost to the outstanding mortgage.

Income Tax
There is no income tax charge on money released from your home, however, if you subsequently invest or save any surplus, you might pay tax on any income generated.

State Benefits
Certain state benefits are means tested against the income an individual receives from investments and private pensions etc.  The monies provided from an equity release transaction could therefore reduce any benefits you might have been entitled to if you retain the monies in your own names.

Roll-up / Compound Interest

As these mortgages are generally utilised to provide much needed funds, the compulsion to repay interest on the loan or repay the capital is normally waived.  Instead, the interest due is added to the loan on a monthly basis, called a ‘roll-up’ mortgage.

This means that the loan increases by the amount of interest owed on a monthly basis.  The compound effect means that the mortgage debt increases each and every month until the mortgage is eventually repaid from the sale of the property.

If the mortgage remains on the property for a number of years, the final mortgage outstanding including the accrued interest could leave little or no remaining funds for your beneficiaries.
The rate of interest is normally fixed from outset and can remain fixed for the life of the mortgage.

Interest Rates

These are long-term mortgages, often the expectation is that the mortgage will not be repaid until the death of the homeowner(s).  Therefore, the rates tend to be higher than the normal residential mortgage market
Most are fixed for the term of the mortgage, however long it is.

Costs

Main costs are as follows;

  • Valuation – dependent on property value, average around £500.  Many lenders currently waive this fee.
  • Application – some lenders make a fee of around £500, paid on completion.  Many waive this fee at present.
  • Solicitor – Due to the complexity of lifetime mortgages, lenders insist that you have legal advice and the typical prices tend to be £700 and above.

Early Repayment

Lenders base their products on the assumption that the mortgage will be repaid on death or the borrower(s) moving into long-term care.

Repaying the mortgage early will have financial penalties.  Some are fixed from outset and depend upon how early – for instance, some will cease after 5-years.

Many, have much more complex calculations, which are dependent upon gilt rates.

When assessing the most relevant product for our clients, we spend time discussing and planning any potential for early repayment.  These are not designed to be short-term loans and it is imperative that expectations of timescale are fully discussed.

Losing your home

As with any mortgage, the over-riding concern is making sure you keep your home.  Most Lifetime Mortgages do not compel you to make interest or capital repayments and therefore, you won’t have that commitment.
As long as it is NOT a reversionary mortgage, you still own the home and the lender simply has a financial interest, which has to be repaid on sale.

Lenders adhering to the S.H.I.P (Safe Home Income Plans), will provide a ‘No Negative Equity Guarantee’.  This is a really important part of the deal, as it secures your ownership of the home, even if the value of the property becomes lower than the mortgage and accrued interest.

In recent years many homeowners have seen their potential Inheritance Tax liability rise alongside house values.

Making gifts while you are alive is often not easy, as you might need access to your savings.

Using equity release to borrow money against the value of your home, has the effect that when the mortgage and accrued interest is repaid from the value of your home, there is less in your estate and so the Inheritance Tax due is reduced or disappears completely.

Equity release might be a perfectly sensible way of raising money if you need more income or capital in retirement. Using equity release will reduce the amount of your estate and the tax due, but it needs to be planned correctly.

If the length of time you have the mortgage is longer than you thought, the actual value you leave your beneficiaries could be greatly reduced.  Assuming the house suffers the full effect of inheritance tax, your beneficiaries might prefer to have 60% of something than 100% of nothing.

The mortgage market place has dramatically changed recently with many more innovative products available outside of the normal income and affordability dependent lending decisions.

Longer lending term

You can access Interest Only mortgages up to your 95th birthday
These work like a normal mortgage, whereby your ability to make interest payments will be assessed, as you could lose or be forced to sell your home if you do not or cannot make the interest payments.

Alternatively, you can start with the style of mortgage above, and once you reach a certain age, say 80, you can automatically switch to an Equity Release mortgage where the interest is rolled up.

Flexible Payment Terms

Rising house prices has lead to many older family members providing deposits for (grand)children.  Some lenders will allow for some or all of the interest to be paid on a monthly basis, without it being a commitment that could mean losing your home if payments are not maintained.

This could allow your beneficiaries to pay the interest, which maintains the debt at its original level, rather than allowing it to eat into the remaining equity over the years.

Moving house

Most Lifetime mortgages are portable, which means that should you wish to move, you can effectively move the mortgage to a new property.
The new property will need to have enough equity to meet the lenders criteria, failing that you might need to pay some, rather than all of it off.
This can be a very useful element, as you might wish to move closer to family, or downsize to a different area.

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