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Can Equity Release Schemes Prevent you Becoming an ‘Interest Only Mortgage Prisoner’?

Sunday, December 22nd, 2013

Can equity release schemes help unlock interest only mortgage prisoners?It seemed such a sensible thing to do at the time. Perhaps you were just starting out on the property ladder or you wanted to move up market to afford that dream home and as a result your income was stretched?

 

Back then an interest only mortgage was a perfectly reasonable option for a few years until your earnings increased and then you could switch to a full repayment mortgage. Or perhaps, very sensibly, you set up a repayment vehicle such as an endowment plan or you relied on the anticipated growth of your pension fund to take care of the mortgage in the dim and distant future?

 

Reaching retirement with an interest only mortgage

Life never quite works out as expected and here you are, approaching or beyond retirement, with a mortgage still outstanding and with a mortgage lender demanding to know how you intend to repay. Either you never got around to switching to a repayment mortgage or, by reason of poor investment performance or poor advice, your repayment fund has fallen woefully short of target.

 

You are not alone! Earlier this year the Financial Conduct Authority report that that almost half of those borrowers with interest only mortgages, approximately 1.3 million people, may not be able to repay their mortgage. And the average shortfall is estimated to be £71,000.

 

Can the high street lenders help?

So how have high street mortgage lenders responded? Mainly by applying higher interest rates to existing interest only mortgages or by forcing borrowers into repayment plans, usually very short term for borrowers over 60, with little regard to affordability or even existing and adequate savings plans.

 

So how do you break free from this “mortgage prison”?

Firstly, you must consider your options for the future;-

  • If you have savings, do you want to use them to reduce the outstanding mortgage, bearing in mind that the cost of the mortgage will certainly outweigh any return you are making on your savings?
  • How much of your savings do you want to retain as a cash emergency fund?
  • Do you intend to move now or within the next few years and, if so, will this allow you to repay the mortgage, cover all the moving costs and leave sufficient finds to re-house yourselves?

 

Secondly, if these options are not available to you and you want to remain in the family home, then you could consider an equity release mortgage, preferably after eliminating all other possibilities and following consultation with your family.

 

How can equity release schemes help?

There are two types of equity release plans approved by the Equity Release Council and they come with the following written guarantees:

  • You can stay in your home for life or until you go permanently in to care. In the case of joint applicants, this is until the survivor dies or goes in to care.
  • The plans are portable to other acceptable properties if you want to move.
  • No further monthly interest payments to make, unless you elect to do so.
  • You will never leave a debt to anyone due to the inclusion of a ‘no negative equity guarantee’

 

The two types of equity release mortgages are

  1. Home Reversion Plans – where you sell a percentage share of your home in exchange for a cash lump sum or regular income.
  2. Lifetime Mortgage Schemes – where you release funds secured on your property with the option to either roll-up the interest with no monthly payments, or to pay monthly interest in full or part.

 

Case Study example

A couple aged 66 and 65 living in their home valued at £300,000 and desperately wanting to repay an interest only mortgage of £60,000. The maximum they could raise from a standard lifetime mortgage would be 29% of the property value, i.e. £87,000. They have options and the following are examples of mortgage products currently available:-

 

a)      They can choose to borrow £60,000 (plus more to cover fees) to repay the existing lender and have the interest rolled-up for life with no further monthly payments. The valuation fee could be free with some of the current equity release deals available. The other costs taken by lender, solicitor and adviser could amount to approximately £2,000 which could be deducted from the loan. The interest rate fixed for life on equity release plans such as the Aviva Lifetime Flexi could be as low as 5.62% (5.80% representative APR) and, in addition, they could have ready access to a cash reserve if they wanted to borrow more in the future.

 

b)      They can choose to borrow the £60,000 (plus more to cover fees) and pay the monthly interest for life or for a fixed number of years. Dependent upon income, the lifetime fixed rate could be fixed as low as 4.75% (5.10% representative APR) resulting in a maximum monthly interest payment of £238pm. However, if this is too much for their budget they could elect for alternative plans such as Stonehaven’s Interest Select range & opt to pay a lesser sum each month (minimum of £25). The remaining unpaid monthly interest would be rolled up and repaid at the end. The fees are approximately the same, but a valuation fee of £252 would be payable with the Stonehaven application form. Hence, we have interest only lifetime mortgage options to suit.

 

A new breed of lifetime mortgages

Recently, a new form of lifetime mortgage has been developed to help those looking for the maximum possible release. The enhanced lifetime mortgage, or ‘ill-health equity release plan’ has been developed with the maximum release in mind.

 

Although the maximum equity release isn’t suitable for everyone, it has its place for those who desperately want as much as they can release for either health reasons or a ‘needs must’ basis.

 

They differentiate from standard lifetime mortgage schemes by assessing someone’s medical history. Essentially, the worse one’s health has been, the greater the potential release. These plans are underwritten & are offered by actuarially based companies with experience in the field of pension annuities where similar principles are employed.

 

Therefore, an enhancement can make the difference between be able to repay that interest only mortgage, or not, so enhanced lifetime mortgages should always be considered with your adviser.

 

Summary

Equity release is a sensible option to escape becoming a “mortgage prisoner” but expert advice from a qualified equity release adviser is always essential. Explore the alternatives first and discuss matters with your family to obtain a second opinion.

 

If you would like a free initial consultation to assess your interest only mortgage options, please contact Mike Vicary of Equity Release Supermarket, on 07795 195302.

 

Mike has successfully helped people make the interest only remortgage transition, thus enabling retirees to remain in their home & avoid becoming an ‘interest only mortgage prisoner’.

 

New Life Mortgages Buck the Trend & Launch a New 25 Year Interest Only Retirement Mortgage for the over 65’s

Wednesday, October 10th, 2012

The tabloids are currently awash with articles proclaiming the death knell for the interest only mortgage. We only heard a few days ago the Nationwide are just one of the high street mortgage lenders in declaring themselves out of the interest only mortgage market.

 

But are these lenders missing a trick?

 

There is a potentially huge retirement mortgage market out there; a society that has grown up on a life of managing debt. They have paid off their mortgage, loans and credit cards during their lives which has created a culture of good financial management and has enabled them to build a significant volume of equity in their property.

 

Lenders need to understand more about the needs and demands of our retired population: –

  • Pensioners have fixed incomes which will usually be incremented each year
  • Most have a good credit history with track record to prove this
  • The older population tend to manage credit better & have not harnessed the ‘buy now, pay later’ mentality of today’s younger generation
  • They cannot be made redundant, nor lose income due to sickness or injury

 

We know in business, where one dares to tread another will be quick to follow and New Life Mortgages have done just that with their newly launched Over 65’s Retirement Mortgage.

 

Who are New Life Mortgages?

New Life Mortgages have been offering equity release schemes since 2003 and their innovative ideas were behind the first ever buy-to-let equity release plan and 2nd home lifetime mortgage schemes.

 

Having been assessing the market for their latest launch, New Life has evidenced the potential behind the vacuum left by the withdrawal of products such as the Halifax Retirement Home Plan in 2011.

 

The 65+ Retirement Mortgage

The newlife mortgages 65+ mortgage is aimed at homeowners with a minimum age of 65 who are looking to raise a tax free lump sum secured against their property and who wish to remain in situ for the foreseeable future. The important aspect of this plan is the term – there is no upper age limit and the applicants can take it out over a 25 year term, possibly longer with lender approval.

 

Available on an interest only or capital & repayment basis, the 65+ mortgage has an interest rate of 5.74% variable. Therefore, applying for a £50,000 mortgage on interest only basis would cost £239pm.

 

Early repayment charges (ERC’s) are favourable also which isn’t the norm on most equity release or interest only lifetime mortgage schemes. With a penalty of 3% in the first year only and none thereafter, the 65+ mortgage could certainly could suit those who are unable to sell their properties in the short term but still need cash funds.

 

How much will New Life Lend?

Standard mortgage lending criteria applies and affordability needs to be evidenced to determine how much can be borrowed. A common sense approach, and & possibly one that most lenders in the current environment could benefit from.

 

The formula for calculating maximum borrowings  are based on income of 4x the first income plus 2.5x the second, or simply 3.75x joint income, whichever provides the highest release for the client. Even still the loan must prove affordable when viewed in conjunction with other household expenditures. Usual credit checks are made and references requested if necessary.

 

The overall maximum amount that New Life Mortgages will lend is £350,000, although again this can be reviewed subject to individual criteria. One caveat though is that the maximum amount that can be borrowed is 50% of the property value & there must be £150,000 equity remaining after the mortgage is granted. Therefore, the over 65’s mortgage may not fit all criteria; however it is hopefully a move in the right direction for pensioner mortgages.

 

Finally

The 65+ mortgage is available on a purchase or remortgage basis. If remortgaging then New Life Mortgages are currently offering a FREE legal fees package on every application.

 

If you wish to check eligibility or request a quote on the New Life Mortgages 65+ Mortgage please call the Equity Release Supermarket team on 0800 678 5159.

 
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