Tony Catt Independent Financial Adviser
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Lifetime Mortgages
This is a method of raising money on the value of your property. It is aimed at older people who have built up value in their property and simply wish to use some of that value to enhance their lifestyle.
 
 
Equity Release
This is normally a cash loan taken from the value of the property. No repayments are required, but the interest is rolled up into the capital outstanding. The actual amount of money available at the outset is based on the age of the clients and the loan to property value increases with age.

 
Reversion Plan
This involves the sale of the property in return for a lump sum. This will often make available a higher amount of cash, but the downside is that the property has been sold and no longer belongs to the clients.
 With both fo these types of plan, there is a guarantee that the clients can remain in the property throughout their lifetime with no rental payments. Members of the Safe Home Income Plan (SHIP) regulatory regime also guarantee that no property will go into negative equity. 

Risks involved in Lifetime "Equity Release" Mortgages

 

Lifetime "Equity Release" Mortgages have been the subject of negative press reports over the years.

There are many reasons for this and therefore great care must be taken when considering how appropriate this type of borrowing is to an individual client.

 

Client understanding - due to equity release loans only being available to older people, occasions may arise where the client may not understand the consequences of the arrangement. Therefore, it is important to get other family members involved to make sure that the clients understand the products as far as possible, in order for them to be confident to commit to the arrangement.

Many lenders do not accept applications that involve Enduring Powers of Attorney. Alternatively, they will insist that they are registered under the Court of Protection.

 

Increasing Debt – the nature of the cash release type of mortgage is that no repayment is made on a monthly basis and the interest accrued is simply added to the outstanding borrowing. This addition of interest will have a compounding effect over time.

Whilst there is a “no negative equity” promise on most cash release loans, the amount of the outstanding loan is likely to get close or even overtake the value of the property if the loan is in place long-term. The speed of erosion of equity is dependent on the value of the property and the property value growth over time.

 

Most realistic estimates would reckon on the property value being reached between 20 and 25 years into the loan. In the event of no house price growth, this point is reached sooner. If house prices rise by more than the interest rate being applied, this point will never be reached.

 

Property ownership – the Home Reversion type of plan gives the ownership immediately to the lender in exchange for a percentage of the value of the property. Although the clients are free to move house and are guaranteed residency in their lifetime, there will be no asset to leave behind to their own beneficiaries.

 

With a cash release arrangement, the property remains in the ownership of the client. This is a source of comfort to most people. Also it means that the remaining value of the property can remain in the estate.

 

Use of money – much of the recent press criticism has been directed at the use of money generated from this type of borrowing.

 

The clients should have a specific use for the money they are raising. Suitable uses would be capital expenditure on their property for extensions or improvements or lifestyle expenditure such as cars and holidays.

 

If they are looking to generate income by investment, the investment has to be suitable for this income generation at minimal investment risk levels or at a risk level that the client has specified is acceptable. Ideally, the investment should grow at a greater amount than the interest rate being applied to the loan, which is unlikely without an extra element of investment risk; otherwise the clients are simply losing money.

 

Loss of means-tested benefits – the generation of a capital sum or additional interest will need to be reported on a tax return. If the client is in receipt of pension credits or any other means tested benefit, this may be reduced or even totally lost.

 

YOUR HOME MAY BE RE-POSSESSED IF YOU DO NOT KEEP UP PAYMENTS ON A MORTGAGE OR OTHER LOAN SECURED ON IT.