Equity release exists in different forms and consequently they can be repaid in different ways. There are two main types of equity release schemes that exist today which are the lifetime mortgage and home reversion plan. With lifetime mortgages nowadays accounting for over 98% of all equity release applications, there are more variants on this theme than the home reversion plan.
Here we discuss the repayments options available on both of these equity release schemes.
Both of these equity release schemes are designed to run for the rest of one’s life and it is important to remember that if premature redemption arises, then the lender can penalise you by way of early repayment charges.
Lifetime mortgage schemes embrace plans such as the drawdown schemes, interest only lifetime mortgages and the maximum cash release plans. To understand how these can be paid off, we need to understand the principles behind the lifetime mortgage plans which will allow us to assess how these schemes can be redeemed.
In essence, all lifetime mortgages allow you to free up some of the equity built up within your property, without the need to move out of the house. It allows you to continue living in the property, but free up some of the equity contained within and use the funds to enhance one’s lifestyle or help the family in times of need.
The difference between the lifetime mortgage and the home reversion plans lies in the ownership of the property and this has a large bearing on how easy redemption of these schemes can be.
A roll-up lifetime mortgage is simply a mortgage taken out on the property, but usually has NO monthly payments. The interest is generated on the loan by the lender either by compounding it on a monthly or annual basis. Obviously, with an equity release mortgage compounding on a monthly basis, it will result in the debt growing much quicker than one compounding annually as the interest being charged more frequently.
The essential feature of lifetime mortgages that makes repayment much simpler is the fact that 100% ownership is retained by the homeowner(s). This factor alone means that repayment of a lifetime mortgage is solely down to the homeowner and whether they wish to repay, or not. There will be factors involved as to whether it would be best practice to redeem due to potential early repayment charges; however this decision is down to the homeowner alone.
Now we know how lifetime mortgage schemes work, we can now understand how they can be paid off. As stated previously, these schemes are designed to run for the rest of your life. Therefore, standard rules apply for repayment under normal situations if the following occur: –
1. death of the borrower (or death of the second borrower if a joint lifetime mortgage plan)
2. moving into permanent long term care (or the second borrower moving into long term care if a joint lifetime mortgage plan)
At this point, the executors of the estate will have upto 12 months to repay the lifetime mortgage. This is normally achieved by sale of the property; however it doesn’t necessarily have to be the case. This is an area many people do not consider and is a point we raise with all our clients.
In some situations the beneficiary may wish to retain the property for personal or commercial reasons. However, the lifetime mortgage still needs to be repaid. Therefore, the beneficiary could raise their own finance on the property upon transfer of the equity.
This could be by way of buy-to-let mortgage if the property is to be rented out, or from a remortgage of their own main residence to raise the cash, in order to redeem the equity release plan. With today’s buoyant rental market, a buy-to-let remortgage could be a viable option then selling. This is especially so, given the poor state of the residential property market and trying to achieve a good sale price today. So why not defer the sale by taking over the ownership of the property if possible, and use for your own, or families benefit if practicality exists.
Another factor that could determine redemption of a lifetime mortgage would be if a windfall is received such as an inheritance or even winning on the lottery! Even downsizing properties would raise a cash lump sum which can then be utilised in repaying an equity release scheme. The question is however, whether repayment should go ahead?
This will depend on early repayment charges applied to the scheme from inception. As different lifetime mortgage companies levy these charges in different ways, it is always best to request a redemption statement from the lender. This will quantify exactly how much of a penalty, if any exists. Only at that point should a decision be made and this will be down solely to personal or financial reasons. For this reason you should always discuss this with family, but more importantly with your equity release adviser as there maybe ways around the penalty. For instance, there may be a case of possibly deferring repayment if certain events maybe on the horizon which mean the situation could be different in the future.
Home reversion plans were designed to enable someone to sell a part, or all of the value of the house in return for a tax free cash lump sum provided by the reversion company.
Therefore, with home reversion schemes you partly own the property. Dependent upon the percentage sold, you still have guaranteed equity remaining for yourself or beneficiaries in the future. Conversely, if you have sold 100% of the property value, you have no equity remaining and therefore have no further options other than living there for the rest of your life with the benefit of the lifetime tenancy.
Due to the mechanics of the reversion scheme they do not necessarily apply any early repayment charge. However, if you wish to ‘buy back’ the share you had previously sold then this may be possible. However, you would be buying back at today’s prices rather than the price you sold the equity share at originally. This may be good, or bad news dependent upon how the property market has changed in the meantime.
Again, a home reversion loan is essentially repaid when the house is sold, which is usually on death or long term care. Therefore, upon eventual sale of the property on death or long term care, the beneficiaries will be repaid the percentage of retained ownership, from the sale proceeds.
There are many factors that can influence repayment of an equity release scheme. If you are unsure on your options then contact Compare Equity Release to ascertain your options and get independent advice.
Compare Equity Release advisers are available 7 days a week on 0800 028 3142 or you can email us at [email protected]. Feel free to contact us anytime.Back