Regular Committed Interest Payments
Moving on from where we left off, there’s also the option with some lenders, to make regular committed payments of interest, just like an earlier life Interest Only mortgage. The advantage is, just like an Interest Only mortgage, the debt will not increase over the years, but neither will it decrease.
You can choose to service the whole of the interest payment or a portion of it. Your choice, whatever you’re comfortable with. Be aware though, once you’ve made your decision you can’t change the amount later, and you’re not normally allowed to reduce the capital outstanding.
You can decide at any time to stop making the payments and that’s fine. The mortgage will then revert to a standard rolled-up interest Lifetime Mortgage. From this point, your plan’s likely to allow ad-hoc payments, again subject to terms and conditions. This means you could probably start overpaying and reducing the capital outstanding as well as servicing the debt. Note that subject to terms and conditions, the rate of interest being charged may go up when you stop regular payments.
Again, I must stress the need to consult your formal Illustration, KFI document for the exact details of your plan and full terms and conditions.
This allows you to move home and repay the mortgage in full, without penalty, if the property you’re moving to is not acceptable to your lender as security. Examples of unsuitable property could be a park home, log cabin Thames houseboat to name but a few. If you’re thinking of moving, always check with your lender before setting your heart on a new home.
For Downsizing Protection to work, there must be a sale and a purchase. In other words, you can’t sell your home then move into a relative’s property without buying it.
Certain lenders may be prepared to lend more than normal, or at a lower rate of interest, or a combination of the two, depending on your state of health. This works in the opposite way to what you’ve probably experienced earlier in life when buying life insurance. Here, if you are not in the best of health Enhanced Terms could provide a better deal. Simply put, the reason is the lender is likely to get their money back more quickly and be in a position to lend it out again!
Most plans will allow you to protect or ringfence part of the value of your home for your beneficiaries. You can decide how much-guaranteed value you want to leave and no matter what happens to house values, your beneficiaries will get that percentage of the sale proceeds.
However, there’s a downside. For example, your home’s worth £200,000 and you want to guarantee 40 per cent of the sale proceeds for beneficiaries, today’s value, £80,000. Therefore, the lender can only work with the balance, £120,000. If the maximum loan to value (LTV) you can have at your age is say 35 per cent, you could borrow a maximum of £42,000 today. Without the Inheritance Protection, the maximum available could be £70,000.
If you’re not looking to take the maximum available, this might not be an issue. However, because of the lower overall amount the lender can provide, they might charge a higher rate of interest from the outset. In fairness, most customers say they would be happy for their beneficiaries to take whatever’s left on the final sale of the property. Indeed, when you consider a major use of Equity Release is for gifting to family, this isn’t unreasonable as they benefit from an early inheritance.
Again, lenders tend to use their own calculations for this so please check the details in your personal Illustration KFI document where all the details terms and conditions can be found.
Income paying plans
New to the market, and yet to gain traction. Here you take a much lower initial amount, usually no more than about 10 per cent of what you could have borrowed. Then you take an income, set to a pre-determined range of years, say 10, 15, 20, or 25 years, currently fixed for life. At the end of the chosen term, the income will cease.
These plans are yet to mature but I’m sure they’ll gain in popularity over the years. They fit a completely different borrowing profile. Because the initial amount taken is quite low, and the income withdrawals are incremental, the roll-up of compound interest is slower.
Again, lenders differ so please check the details in your personal Illustration KFI document where all the details terms and conditions can be found.