Lifetime mortgages

Not everyone is prepared to sell the family home. But if the majority of your assets are tied up in your property then you can still get hold of some money without selling up and downsizing; by opting for equity release. Lifetime mortgages make up 95 per cent of the equity release market and a recent flurry of new launches have brought them into the spotlight again.

How do lifetime mortgages work?

Like a regular mortgage, a lifetime mortgage enables you to take out a home loan but retain full ownership of the property. You receive a lump sum, regular income, or both. You pay interest on the loan but not during your lifetime; instead it is added on to your loan each year and rolled up. When you die your home is sold and the debt repaid. The longer you live, the greater the debt and the less money left over for beneficiaries to inherit.

So what’s on offer?

Until now, there has not been much, if
any, product innovation in the lifetime mortgage market.

The main providers include Bristol and West, Prudential, Key Retirement Solutions and Norwich Union.

However, Bluestone Equity Release, an Australian financial company, among other companies is set to launch lifetime mortgage product.

Any variations on the standard lifetime mortgage?

In the past few months providers have started offering plans that allow you to withdraw equity from your home in stages up to a maximum amount agreed at the outset.

Prudential’s Property Value Release Plan has a fixed rate of 6.45 per cent and the minimum lump sum you can take initially is £20,000 but you can draw out sums of £5,000 or more in the future.

Just Retirement’s lifetime mortgage is similar but charges 5.99 per cent and Northern Rock, just 5.89 per cent.

What’s the average rate of interest on these plans?

The rate of interest you pay on a lifetime mortgage is usually at least a couple of percentage points higher than on a regular home loan. However, rates vary significantly between providers but are coming down. Bristol & West is currently the cheapest at 5.79 per cent.

Is there an alternative to lifetime plans?

If you don’t want to go for a lifetime mortgage you can choose a home reversion scheme in which you sell your home or a share of it to a private reversion company instead. You get a cash lump sum in exchange, which can be used to buy an annuity or other investment to provide income.

You continue to live in the property until you die; your home is then sold and the reversion company repaid.

So which one should I go for?

Equity release schemes don’t suit everyone. You must be at least 55 to be considered for either plan although the average age people take these out is at 65. At the age of 65 you can release about 25 per cent of the value of your home; this rises to 35 per cent at the age of 75 and 45 per cent at the age of 85. But remember every year you live after you release some equity is another year’s interest your estate has to pay.

What about regulation?

Most lenders belong to Safe Home Income Plans (Ship) which guarantees that a homeowner will never have to repay more than the sale price of your home.

Lifetime mortgages are also regulated by the Financial Services Authority. Home reversion plans do not enjoy this protection at present, but legislation is expected to bring the sale of such schemes under FSA control by 2007.

What are the risks?
With a lifetime mortgage scheme, there
is a risk that, when you die, your heirs
will have to use all the proceeds from the sale of your home to cover the debt so there will be little left in your estate to pass on.