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When it comes to equity release, a lifetime mortgage is the most common form of lending. A lifetime mortgage is a range of products that sit under the equity release umbrella. A lifetime mortgage offers you the opportunity to release capital tied up in your home (i.e. the equity). Unlike a conventional mortgage, which runs for a fixed term, a lifetime mortgage is designed to run for the rest of your life. You continue to own the home and only pay back the lifetime mortgage once you die or move into long term care. Unlike a traditional mortgage the interest is added to the loan amount, which means that it appreciates and will cost more the longer the loan is open. However, it can be a great way to release cash from your property if you have the available equity, without having to downsize or move. There is a range of lifetime mortgage products available from different lenders, depending on your requirements. We go into full details on each of these in our lifetime mortgage guide
Lenders don’t typically offer mortgages to customers once they retire as they view this as a risky investment. However, there are specialist retirement mortgages available to customers over the age of 50. These work as a large loan against the property, similar to a traditional mortgage. You will need to make regular payments, the same as a regular mortgage with the term typically fixed between 10-15 years. These are ideal for customers with an income past retirement age.
In 2018 the FCA authorised the latest form of equity release plans, the retirement interest only mortgage (or RIO for short). It works the same as a traditional interest-only mortgage in that you repay the interest on the mortgage each month and when finished, the balance remains the same as when you started. There are strict rules for proving income and passing lending criteria with retirement mortgages, both repayment and interest only. The main difference with RIO mortgages is that the term isn’t fixed. You pay the interest each month until you die or move into long term care
A home reversion plan is an equity release product that allows you the opportunity to sell a percentage of your property (at its current market price), without having to move out, in return for a tax-free cash lump sum or monthly income payments. However, the equity release company won’t get its hands on anything until the property is sold, whether that is when you pass away or move into long term care. The amount the company offers to you will be well below the share’s actual value. For example, a 20% advance means surrendering 70% of your property’s value. The lender takes a larger share of your property, as they lend an initial amount and then have to potentially wait a long time before they see their money back.
There are a lot of advantages to equity release. A few of them are:
• You will retain ownership of your home until you move into long-term care or die. You can choose how you spend your money. For example, use it to pay for care, re-invest it, fund vacations, or make home improvements.
• You’ll have negative equity guarantees. Therefore, you’ll never pay more than what your property is worth when the product life ends, as the product is backed by the ERC.
• Tax-free access to money
Every financial product comes with a few disadvantages. Let’s take a look at some for equity release.
• Equity release can result in a reduced inheritance amount that you leave behind.
• With equity release products, valuations are often lower than you might get for it on the open market.
• Equity release schemes affect your tax status and entitlement to specific welfare programs.
• Interest rates in equity release schemes can be higher than conventional mortgages or other loan options (although most traditional mortgages aren’t available to over 55’s)
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