HOW LIFETIME MORTGAGES WORK
A lifetime mortgage is the term adopted by the Financial Services Authority (FSA) in its review of equity release schemes whereby a mortgage is created against the home. Full regulation of mortgage based equity release schemes is planned to be in place by October 2004. A consequence of this will be that anyone advising on lifetime mortgages will be required to consider the merits of home reversion schemes as well.
With a lifetime mortgage you retain full ownership of your home and are not required to repay any interest while you live in the property but, instead, the interest is added to the loan. Normally, this will be repaid when the house is sold on death or moving permanently into a care home. The following are some important considerations (covered in greater detail later in this chapter) which you should fully understand before joining one of these schemes:
- 1. Do you understand the position concerning interest - the rate itself and how the loan accumulates?
- 2. What happens if the rolled-up loan amount should reach a certain percentage of the property value or exceeds the property value itself?
- 3. What is the situation should you wish to move in the future?
- 4. Have you considered the impact on any present or future State benefits if you improve your financial position?
- 5 Do you have any plans to change the structure or use of your property that could be affected by any plan you take out?
Are you eligible?
The minimum qualifying age varies from scheme to scheme, but it is usually 60 or 65 (although there are some which start at 55). The types of property eligible for a lifetime mortgage are broadly similar to those accepted for reversion schemes (see pages 10-11), but you should check your eligibility with each lender you contact. Minimum and maximum property values are set by the individual companies and typically vary from £40,000 (minimum) to £1,500,000 (maximum).
How much will you get with lump-sum schemes?
The maximum amount you can borrow varies according to the company, and usually according to your age. Most lenders operate a sliding scale, allowing older people to borrow more than younger people. For example one scheme currently allows a maximum loan of 20 per cent of property value at age 60 and 50 per cent at age 89. However, this ratio of percentage loan to valuation is increasing as new providers enter the market. In practice few loans are arranged below £10,000 although one lender has a current minimum of £5,000. As with all schemes, it is important to take a view on both your present and future needs. There may be a waiting period of up to five years before further funds can be released and setting up costs will, of course, be proportionately greater for smaller amounts.
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