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Halifax was the victim of regulation years back when they accidentally found themselves in the equity release market. They were offering what was then called the Halifax Retirement Homeplan, which was specifically designed for retirees over the age of 65 years of age.
The Retirement Home Plan was reclassified as a Lifetime Mortgage as it met the criteria of the (then) regulatory body the Financial Services Authority, now re-branded as the Financial Conduct Authority.
As MortgageStrategy.co.uk pointed out this is how the FSA classified what a Lifetime Mortgage was…
“A mortgage aimed at those who have assets but not income – typically older consumers – and is designed to release equity from the home. Repayment of the capital, and sometimes the interest, only happens on the sale of the property, usually on the death of the borrower.”
It should be noted that today, equity release is accessible to all homeowners over the age of 55. It’s not exclusively for people who find themselves asset rich and income poor. The emphasis above is because it’s accessible to everyone, but it’s not always suitable.
Equity release is a regulated financial product with strict policies in place for selling them. Due to regulation, the Halifax Retirement Homeplan was required to be classified as a Lifetime Mortgage, and therefore, subject to industry regulation, requiring it be moved from mainstream mortgage brokers to specialist intermediaries.
The result was a soft launch of the Halifax Equity Release scheme with one problem. Technically, it wasn’t a Lifetime Mortgage. It was an interest-only mortgage suited to retirees. The interest was payable every month for the term of the loan. Only capital was repaid upon death from the homeowner’s estate.
Ray Boulger, Technical Manager at Charcol.co.uk, explained to Mortgage Strategy, that to qualify as a lifetime product for equity release, it must have interest roll-up. The Halifax Equity Release did not offer that. All they had was an interest-only mortgage, with a minimum age requirement and the only reason for them offering it was due to regulatory requirements. It was short-lived, and Halifax did eventually withdraw themselves from the equity release market.
One of the problems most high street lenders are challenged with is the speciality nature of lifetime mortgages. They are highly regulated and require a knowledgeable and qualified advisor to advise on all the need-to-know information for future financial investing, retirement planning and ensuring you go into any deals fully aware of the knock-on effect a lifetime mortgage can have on your estate’s value.
Another potential pitfall for mainstream lenders is the requirement to offer a No Negative Equity Guarantee. This is a requirement of the Equity Release Council – the trade body for lifetime mortgages. The guarantee gives retired homeowners peace of mind that they’re never going to be leaving behind debt as if there is negative equity in the property when it is sold, your family don’t inherit the debt. The lender bears the loss.
Speciality lenders work in provisions to ensure they’re able to bear the brunt of any financial losses. Most offer an upper lending cap of 50% of your current property’s valuation and have a minimum valuation, often £100,000, sometimes slightly lower.
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Homeowners over the age of 55 can release up to 50% of their property’s worth. Most lifetime mortgage lenders will have a minimum borrowing amount, usually 10%.
On a property worth the minimum £100,000, you can borrow from £10,000. The max you can borrow varies by the lender, but it’s often capped at 50% of your current home valuation. There is an exception with Enhanced Lifetime Mortgages as these can be a higher percentage of equity at a lower interest rate. Enhanced equity release is subject to specialist underwriting as the products are tailored to those with an illness that will shorten their life expectancy.
One of the ways the Halifax equity release scheme failed with both brokers and consumers is because the only option to repay interest was on a monthly basis. It meant homeowners could access the equity from their home, and pay the interest for the rest of their lives. In terms of their previous Halifax Retirement Homeplan, that was for people in retirement over the age of 65, borrowing over a 40-year term.
It was designed to run until you’d reach the age of 105 years old, which given the average age of mortality is below that, in all likelihood, it would run until your death and be repaid from your estate. If you wanted the option to repay while you’re alive and not from your estate, the alternative is to remortgage.
Lifetime mortgages run for the rest of your life with no interest payable by you. To be eligible, you need to be over 55 years old. Remortgaging is suited to any homeowner, retired or not, but a problem you’ll encounter is upper age limits. Most big-name lenders such as Halifax, will only borrow up to retirement age and not into retirement.
With Lifetime Mortgages, the upper age limit is higher than most, usually 85 to 95 years old. The options for repayment do vary, but they always include interest roll-up.
You cannot pay off the entirety of your loan without penalty unless the lender has a downsizing protection guarantee built-in letting you repay the loan if you sell your home to move to a new property. An increasing number of lenders include this with the only requirement being that it applies after five years. Early repayment fees won’t be waived if you pay within the first five years of the lifetime mortgage. Different arrangements affect the overall cost of borrowing.
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Drawdown, often labelled as Flexible Lifetime mortgages let you arrange for a maximum loan amount based on your age and property value, taking out a tax-free lump sum with no repayments required as the interest roll-up option means the capital and interest is repaid entirely from your estate.
The No Negative Equity Guarantee ensures your family will never owe more than what your home is sold for. In terms of controlling the interest repayable from your estate, the only interest to roll-up is based on the amount you withdraw and not what you leave on reserve. You can borrow up to 50% of your home equity, take out some of that as a one-off lump sum, leaving the remainder in reserve to draw on later.
If you enter into a lifetime mortgage with drawdown, you could borrow £50,000, take out £12,000 for a dream cruise, refit your kitchen, landscape the garden, spoil the grand kids or invest in a new business if you choose. There are no restrictions on what you can spend the proceeds on as it’s your money. It’s just tied up in your property.
Lifetime mortgages let you take some of that wealth to enjoy your golden years better. Using drawdown, you can have the best of both worlds by capitalising on a one-off tax-free payment with peace of mind knowing the remainder of your funds are available to help pay for long-term care requirements in later life if you need it. And unlike remortgaging, there are no restrictions on what you can do with your money. The only thing that will be stipulated is you keep your home in a good state of repair. You can choose to invest if you like. Most other home loans will not let you borrow against your home for investment purposes.
The interest is only payable on what you withdraw at the time of that withdrawal. If in the case you withdrew £10,000 at the age of 65, living to the age of 80 years old, there’d be 15 years of interest due only on the £10,000 used and at the rate agreed on your initial mortgage offer due paid from the sale of your home. With drawdown, you get the benefit of a tax-free lump sum payment with a safeguard that you’ll have extra funding available for later in life.
Lifetime mortgages with a lump sum payment on interest roll-up will provide you with a one-off payment. Future borrowing is not guaranteed, but it will require a renewed application.
In addition to drawdown and lump sum payments, a select group of speciality lenders offer Enhanced Lifetime Mortgages. These are suited to those who have a medical condition that’s likely to shorten their life expectancy. With these, you can apply for a higher percentage of your home equity on a lower interest rate.
The eligibility criteria for Enhanced Lifetime Mortgages varies by provider. Generally, your financial advisor will go over a health and lifestyle questionnaire with you, explaining the terms, what can be done by which providers and at what rate, as well as discuss any guarantees you’d prefer to have in your policy. Enhanced Lifetime products are tailored to individual circumstances and subject to a different underwriting process than standard equity release schemes.
With all the options there are to explore, it’s no wonder the Halifax Equity Release Scheme fell by the wayside. Specialist equity release companies and brokers have been helping retirees tap into their property wealth successfully from the late 90's, before which, the industry was plagued with endowment mortgages that under performed.
Today’s equity release products have a number of safeguards integrated into the products, mainly a guarantee that your family will never inherit debt if your property drops in value. As more lenders are entering the market, we’re seeing more guarantees such as downsizing protection where the lender waives early repayment fees, often after five years from when the initial loan is approved. There are also flexible repayment options letting you pay a percentage of your loan amount penalty free annually, whereby you build your equity back up, leaving more behind for your loved ones.
1st UK are experienced with all types of equity release products, work with a variety of specialist lenders and have access to the whole of market, meaning we’re not tied to any lender and therefore can and do provide impartial advice and work with you to find a solution that’s right for you and your family.
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