Lots of people turn to equity release to help fund a better retirement. But what some may be unaware of is the level of flexibility currently available for those who do, particularly with a lifetime mortgage.
A lifetime mortgage, the most popular type of equity release, is a loan secured against your home and can be tailored to your specific needs.
At Key, our equity release advisers compare products from the whole of the market in search of the right plan for you.
But what do we mean by the “right plan”?
A lifetime mortgage allows you to choose how you would like to release some of the tax-free cash from your home.
It gives you the option to release the cash in one lump sum or, if you want to take out an initial smaller amount then release further funds as and when you need to, via the drawdown option.
Lump Sum vs Drawdown
With a lump sum lifetime mortgage, you take the full amount in one go. Compound interest is added to the loan amount until the plan comes to an end.
The loan, plus compound interest, is usually paid back when the home is sold, which typically occurs either when you or the last remaining applicant move into long-term care or pass away.
A drawdown lifetime mortgage, meanwhile, is a good option if you do not need all of the funds straight away.
Your lender agrees an overall sum of money you can borrow, and the compound interest is only added on to the amount released. This means the interest adds up more slowly than it would if you received the full amount from the outset, potentially reducing the cost of equity release.
It’s important to note, though, that if you release some or all of the remaining cash available via your plan’s drawdown feature, compound interest, at the prevailing rate, will be applied to those funds too.
Unlike a traditional mortgage, there are typically no monthly repayments to make with a lifetime mortgage, as the loan plus compound interest is repaid when the plan comes to an end.
Although, some plans do offer the option to make partial capital repayments.
Partial Capital Repayments
This option allows you to make voluntary, ad hoc repayments of up to 15% of the initial amount you’ve borrowed each year. It’s a useful way to reduce the size of the loan and reduce the amount of interest accrued over the lifetime of the plan.
But that’s not the only repayment option you can build into your plan.
Interest payment plans allow you to choose how much interest you want to pay and how long you want to pay the interest for. That’s subject to both a minimum and maximum amount.
Unlike partial capital repayments, these interest payments are more structured in amount and frequency.
Although, if for any reason you are unable to make the payments, the plan can be changed so interest is rolled up as with a standard lifetime mortgage. There may be a fee involved for this change.
But, it’s not just payments where you’re in control.
If you’re concerned what equity release could mean for your family, some plans allow you to guarantee a portion of the future value of your home as an inheritance for your loved ones.
This option lets you ring-fence a percentage of your property’s future value with a protected lifetime mortgage. It provides protection to ensure that your selected portion will be available to be left to your beneficiaries.
However, if inheritance protection isn’t right for you, but you’re still concerned about leaving debt behind through equity release, don’t be. At Key, we recommend plans that come with a no negative equity guarantee, meaning you will never owe more than the value of your home.
If for whatever reason you need to downsize or move, even if you have taken equity release out on your home, with some plans, you can, subject to the lender’s criteria at the time.
If you decide to move into a home outside your lender’s lending criteria, downsizing protection allows you to pay the loan back early without an early repayment charge, as long as you’ve had the plan for at least five years.
But if that’s not feasible, as long as the lender deems your new home acceptable, you can take the loan with you to your new property.
Enhanced Lifetime Mortgage
An enhanced lifetime mortgage may allow you to release more money or receive a better interest rate than that of a standard plan.
You can typically release between 5-55%* of the value of your property, dependant on the youngest applicant’s health conditions and lifestyle choices.
Diabetes, heart problems or being a smoker are three common examples where an enhanced lifetime mortgage may be available.
So, why do people choose a lifetime mortgage?
Aside from more flexible product choices, and the ability to release tax-free cash from your home while retaining ownership, our customers choose a lifetime mortgage for a number of reasons.
Paying off their existing debts, going on a once-in-a-lifetime holiday, making those long-awaited home improvements, future-proofing, and seeing the next generation enjoy their inheritance today.
All of these have been made a reality for our customers through equity release*2.
Of course, there may be alternative options available to you, and equity release isn’t for everyone.
But before making the decision to go ahead, you must speak to an expert equity release adviser. It’s a regulatory requirement designed to keep you safe.
And here at Key, our advisers will tell you if equity release is right for you or not during your no-obligation consultation.
After all, good advice is Key.
Things to consider
Our independent, specialist equity release advisers compare products from the whole of the market to find the most suitable equity release plan for you. They’ll discuss all the options available to you and explain that taking an equity release plan reduces the value of your estate and may affect any means-tested benefits you’re eligible for.
All equity release plans we recommend have a no negative equity guarantee, which means you’ll never owe more than the value of your home.
You should always think carefully before securing a loan against your home.
You have to get expert advice before releasing equity; it’s a regulatory requirement. The initial consultation is free with no obligation to proceed. If you decide to go ahead with an equity release plan, our advice fee – usually 1.99% of the amount released, subject to a minimum of £1,499 – is payable only on completion.
* Key’s Mortgage Comparison Grid 11/01/2019
*2 Key’s Q3 Market Monitor 2018