The Important Points to watch out for with Lifetime Mortgages

LouiseAH

Hi, A good friend of my mum's is looking to take out a lifetime mortgage. She doesn't want to move, has a lot of equity in her house as she has lived there for 35 years and wants to modernize the house and upgrade her car. She wants to pay the interest each month/year so the interest does not compound and the debt stay the same amount. What are the important points to look out for when deciding what lifetime mortgage to choose as there are many on the market. I know nothing about these types of mortgages but said I would try and do some research for her as I wouldn't like to see her end up with a mortgage she in unhappy with. I know she will need to discuss this with a mortgage broker who is specializes in these types of mortgages but she wants to have a general understanding of what to watch out for before then.

MWT

As you know, she will need to take advice, but what is perhaps less well recognised is the cost of the advice, which can range from nothing to several thousand pounds.

Any advisor providing services related to equity release products will receive a payment from the lender, but most will charge addition fees on top of that so when selecting an advisor take care to understand the full cost of their service.

One option that does not charge any additional fee is Step Change Financial Solutions ( https://www.stepchange.org/how-we-help/mortgage-equity-release.aspx ) so worth mentioning them to her as an option.

She will also need to budget for legal fees which should be no more than a few hundred pounds.

Regarding features of the mortgage, distinguish between the obligation to make payments to cover the interest each month, and the option to make such payments... both choices exist and depending on her income she may want to avoid the committent to pay the interest but take a product with the option to do so.

Also look at early redemption charges and the ability to transfer the mortgage to a different property.

Some will offer defined early redemption charges which taper off to nothing over a period of time, others will set a percentage of the mortgage as a fee regardless of when it is redeemed if it is before her demise.

Part of the process will involve a valuation of her house and a check that it meets the lenders suitability criteria.

The suitability covers location and type of construction, but also a general assessment of how well it has been maintained and a judgement on how likely it is that it will continue to be maintained. That means for example that a home that looks like an episode of 'Hoarders' is not going to be suitable, and similarly one that has had no maintenance for the last 20 years is unlikely to get approved.

The lenders do understand the need to release money to modernise but they expect it to be in a decent state of repair already.

Location sensitivities are usually proximity to commercial property, especially food outlets trading into the evening, manufacturing premises etc.

So a rose covered village house several hundred yards from the village post office is perfect, a flat over a take-away restaurant is not.

Do think carefully about use of the funds.

When she takes advice she will be asked about this and will need to satisfy her advisor that equity release is the best way to fund her plans.

Modernisation of the house is a common and well accepted use of funds, purchase of a rapidly depreciating asset like a car may make sense depending on how much of the release she intends to spend on it. This may sound a little judgemental, but depending on her income the advisor may suggest that a modest car loan makes more sense, or if her income is fixed and low then the release may indeed be the best way to fund her mobility. 

The important thing is to be open and honest with her advisor, they are not there to put road-blocks in her way, just to make sure that the proposed path is the right one for her.

Finally, you didn't mention her age, but the amount she can release will depend on her age and health, and the advisor will warn her about the dangers of equity release if she is likely to be needing residential care in the reasonably forceable near future.

There is more that could be talked about, but her advisor will cover these things as well, but hopefully there a re a few comments here that will be helpful.

Linton

A big concern with a RIO (Retirement interest only mortgage) is the interest rate.  They tend to be fixed for an initial duration but after then anything could happen.  Clearly someone in retirement may find it difficult if after the niitial period interest rates have doubled.

For that reason I moved to a roll-up mortgage where the interest does compound but is fixed for the entire duration.

Interest rates have been increasing recently but still are still very low at the moment.

getmore4less

if there is family worth discussing with them as there may be other suitable option where they can help and get better rates or even fund the amounts.

The ERC point is potentially a trap if there is a need to sell that does not meet the criteria to have that waived.

LouiseAH

Great Post MWT. From the reading I had done so far on Life Time Mortgages. There could be a potential problem if you decide to move and the provider of your mortgage is not happy to carry the loan over onto your new property and then you have to pay a early redemption fee which seem to be quite high from some providers. Also there would be more legal fees to pay if you did want to move and carry the loan over to your new property. Also another problem could be when your fixed rate deal comes to an end, interest rates wont stay this low for ever. With the early redemption fees its not like a normal mortgage where you can change to a new provider. Do you think you could stay with the same provider and take a new fixed rate deal. I know if you take a lifetime mortgage you are best to stay in the same property as it just complicates things but you dont know what life is going to throw at you and its good to look at all angles before you commit to something like a Life Time Mortgage.

MWT

One of the features to look for is 'Downsizing Protection'...

If you have that then if the new property you want to move to doesn't meet their criteria you can repay the mortgage without incurring ERC.

As for the interest rate, with equity release, it is usually fixed for the life of the mortgage (unlike a RIO which does have fixed interest periods) so there isn't a risk with regard to future rate rises, but there is a consideration with regard to rate falls...

Right now lower rates are not really a likely prospect, but at times when the rates were higher some people found it harder to remortgage elsewhere to get a lower rate, due to the ERC.

The good news is that the better products do have less onerous ERC these days and for example, a defined rate of 10% falling at 1% per annum for the first ten years is relatively easy to find. It will often lock at 1% for a further 5 years then go to zero.

The other part people forget is that if you want to port the mortgage to a new property, it is the full value including the rolled-up interest that you will need to be able to support with the value of the new property, not just the amount you originally borrowed.

That is less of an issue with current low interest rates, but still something to consider.