Your house is probably the largest investment you have ever made, and over the years its value has increased – proving the shrewdness of your decision to buy in the first place. Realising that investment and turning it into real cash for you to use through your retirement years is often mistakenly thought of as a single option: sell it and move elsewhere.
Equity release provides the better alternative, understanding the memories that make your property a home and not just a house. It provides you with a cash sum for you to spend however you like, secured against your property and to be paid back upon your death. You and your partner remain in your home until you both pass away, and only then is the debt called upon, allowing you to live happy and without fear of repayments.
Of the two options for equity release, lifetime mortgages are by far the most common. This article answers all the questions you may have about the finances of lifetime mortgages so that you can make an informed decision if equity release is something you are considering.
Lifetime Mortgages – The Money Explained
What is equity release?
What is a lifetime mortgage?
How is a lifetime mortgage calculated?
A lifetime mortgage is a loan taken out based on the value of your home. This value is called the equity of the property and is calculated by assessing the market value of the house and deducting any outstanding borrowing secured against it.
- Some lenders will agree to a lifetime mortgage even if other borrowing is secured against the home, while others will only consider an application for a home if it is free of secured debt. At The Mortgage Hut we can help you find the right lifetime mortgage provider for you if you already have secured debt – call for advice.
Accruing interest
Examples of lifetime mortgage borrowing
The following examples are simplified for ease of understanding and do not represent actual quotes; in them, compound interest is calculated monthly.
Example #1: Simon and Sarah James get a lifetime mortgage at 4.3% for an equity release of 40% of their £410,000 home. They release £164,000.
Example #2: Jane releases £30,000 on her £180,000 flat with a lifetime mortgage rate of 3.75%. This represents an equity release of 16.67%
Those basic figures fail to take one important real-world calculation into consideration: the rise of house prices.
It is true that your house could lose value as well as gain it, but trends over recent decades have shown an astonishing level of growth on house prices. Inner city houses have shown to increase in price an average of 7% per year, which is the equivalent of doubling in value every ten years. With this in mind, Simon and Sarah’s house could be worth £1,000,000 or more when the lifetime mortgage (plus all the interest) represents a little under £480,000!
The offset of rising house prices mean that lifetime mortgages rarely come close to exceeding the equity in the house at the time of sale, but what if they do?
Example #1: Simon and Sarah James get a lifetime mortgage at 4.3% for an equity release of 40% of their £410,000 home. They release £164,000.
Example #2: Jane releases £30,000 on her £180,000 flat with a lifetime mortgage rate of 3.75%. This represents an equity release of 16.67%
Offsetting the cost – rising house prices and the no negative equity guarantee
Looking at those figures out of context can be worrying. In the first example, after 25 years it would seem that Simon and Sarah owe more on the lifetime mortgage than the value of the house – can that possibly be true and what happens if that’s the case?Those basic figures fail to take one important real-world calculation into consideration: the rise of house prices.
It is true that your house could lose value as well as gain it, but trends over recent decades have shown an astonishing level of growth on house prices. Inner city houses have shown to increase in price an average of 7% per year, which is the equivalent of doubling in value every ten years. With this in mind, Simon and Sarah’s house could be worth £1,000,000 or more when the lifetime mortgage (plus all the interest) represents a little under £480,000!
The offset of rising house prices mean that lifetime mortgages rarely come close to exceeding the equity in the house at the time of sale, but what if they do?
The no negative equity guarantee
As part of the Equity Release Council standards, all reliable lifetime mortgage providers write a no negative equity guarantee into the contract. This states that the estate of the deceased does not have to pay any additional money to the equity release provider, including any agent or solicitor’s fees.
In real terms, this means that even if your house were to lose value significantly, your heirs wouldn’t be stuck paying of a debt they didn’t want and any remaining funds in the estate are completely protected and would be inherited as intended.
With ring-fencing, you specify the level of equity that must not be touched by the lifetime mortgage upon repayment and that money is then safe and forms part of your estate upon death. Note that the level of ring-fencing you require may affect the terms of your equity release.
In real terms, this means that even if your house were to lose value significantly, your heirs wouldn’t be stuck paying of a debt they didn’t want and any remaining funds in the estate are completely protected and would be inherited as intended.
- All lifetime mortgages recommended by The Mortgage Hut come with the no negative equity guarantee. If you fear your equity release is missing this clause and you need advice, call today to see how we can help.
Ring-fencing – protecting your children’s inheritance
One worry that can arise is that the lifetime mortgage is going to wipe out any inheritance you had planned for your loved ones from the house. Thankfully, equity release comes with the ability to ring-fence part of the equity, making sure that there’s plenty left for their inheritance even if you live a very long life (and accrue a greater-than-expected level of additional interest).With ring-fencing, you specify the level of equity that must not be touched by the lifetime mortgage upon repayment and that money is then safe and forms part of your estate upon death. Note that the level of ring-fencing you require may affect the terms of your equity release.
Paying off the lifetime mortgage early – saving interest and early repayment charges
Equity release advice from The Mortgage Hut
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