Life-time mortgages

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Lifetime Mortgages or Equity Release

A lifetime mortgage is a product which allows you to release some of the equity (or wealth) that you’ve accumulated in your home over the years, so you can benefit from it now.

Many people are “capital rich” and “income poor”, especially when they stop working. Most of their capital is tied up in property, often with the mortgage having been paid off. In many cases, those people own one property which is their home and cannot easily access the capital in the property. A lifetime mortgage allows you to borrow against the capital that is tied up in your property and ultimately, the mortgage is repaid on death or if you have to move to a care home.

You should also be careful if you are planning to secure a lifetime mortgage and make regular payments at a variable rate of interest. Interest rates cannot be predicted and if they rise to a high level in the future, you may find that you cannot pay the monthly repayments.

AREAS OF PRACTICE

Who are lifetime mortgages for?

People who take out lifetime mortgages tend to be older, and in a position where they have built up considerable equity in their property.

There are several types of lifetime mortgages, and they work in different ways.

If you have the ability to do so, you can obtain a lifetime mortgage and agreed to make regular capital and/or interest repayments.

If you cannot afford to make capital repayments, you may choose to pay at least the interest annually.

If you are not able to make any repayments at all, then the interest which accrues is added every year to the loan. This is often known as a ‘Rollup Lifetime Mortgage.

In addition to the method of repayment, you can often choose if you want to take a large lump sum immediately or whether you take a smaller lump sum but have a drawdown facility to withdraw further sums in the future if that suits your plans.

Life-time mortgages

What are the advantages and disadvantages of lifetime mortgages?

It can be easy to get carried away when you are considering a lifetime mortgage. If you choose to have the interest added to the mortgage and you make no regular repayments, the interest which accrues can very quickly mount up and ultimately reduce the equity in your property.

A reduced equity in the property can have a significant impact on the beneficiaries of your estate. If interest is added to the lifetime mortgage, not only will they receive less from your estate on your death, but if your property sells for less than the amount of the lifetime mortgage, the remaining assets in your estate could be used to make up that shortfall.

Lifetime mortgage lenders are regulated by the Financial Conduct Authority and in most cases, the prominent lenders are very strict and careful with their lending policy. In the majority of cases, lenders will not be prepared to lend more than a certain value of the equity in your home. This gives you some protection in the event that interest is rolled up.

However, you must bear in mind that if you are younger, say 65, the lifetime mortgage may not be repaid for 20 years or more. If you opt for interest to be rolled into the mortgage, you may place your beneficiaries in a very difficult position as the property can go into what is known as ‘Negative Equity’. This situation arises where the market value of the property is below any amounts outstanding on all mortgages secured upon if. In order to avoid such a situation, check that your lender includes a ‘no negative equity’ guarantee before signing the agreement.

Life-time mortgages

The legal implications

At Vyman Solicitors, we have an expert team of lawyers who specialise in dealing with lifetime mortgages for clients. We also work closely with numerous well respected brokers in this field. This means that we are familiar with most of the lenders in the market and are able to advice you on the terms of the product you may choose.

Once you have chosen the lender for your lifetime mortgage, we then deal with the legal formalities of the mortgage offer. Most lenders have specific requirements as to the steps which should be taken before the mortgage is completed. These will involve completing due diligence in relation to the property, including undertaking required searches. Once the lifetime mortgage has been completed, this will be registered by us at the Land Registry.