Lifetime mortgage that could boost your income
ENCOURAGING elderly homeowners to downsize to a smaller property is a Government objective, as outlined in last week’s White Paper on housing. But many are reluctant to do so. Indeed, a record number are staying put and instead releasing equity from their homes to give their finances a boost in retirement, as The Mail on Sunday reports.
RECORD low interest rates continue to punish savers, especially those who in retirement depend on regular interest to top up their income. Last week’s news that National Savings and Investments is cutting rates on a number of its key savings products will do little to ease the sense of financial injustice felt by savers.
But for a number of elderly homeowners, there is a way to take advantage of rock bottom interest rates to give their finances an immediate boost. It is through the purchase of a lifetime mortgage.
Low interest rates mean the cost of these loans for new borrowers is slowly falling, boosting their popularity.
Such loans are available to those aged 55 and over, and allow homeowners to release a slice of the equity stored up in their home. The cash released is tax-free and can be used to pay outstanding debts, to help settle household bills or any other way the homeowner chooses.
The mortgages are provided by major insurance companies such as Aviva, LV= and Legal & General.
Although the loans differ across providers, they have some common characteristics.
First, interest rates are fixed. They range from 4 to 6 per cent and average at just below 6 per cent.
Second, while homeowners can opt to make regular interest payments, most choose instead to have the interest rolled up every month, increasing the outstanding loan.
The loan is finally repaid when the homeowner goes into long-term care or dies, triggering the sale of the home. Any money left after the loan is repaid goes to their estate. Most loans carry guarantees that ensure the amount to be repaid cannot exceed the value of the home.
Third, cash can be accessed straight away or released in stages. Drawing money down over a period of time is increasingly popular as it reduces interest charges.
Finally, if a homeowner has suffered serious illness, such as a heart attack, or has ongoing health problems such as diabetes, insurers are likely to lend more as the duration of the loan is likely to be shorter.
Calculations by Aviva show that a husband and wife, aged 69 and 67 respectively, and in good health, could borrow £94,500 against a property valued at £300,000.
They could borrow £108,000 if both had health issues.
If we assume they borrow £79,500 straight away at a fixed rate of 4.5 per cent, the loan would roll up to £155,855 after 15 years. If instead they take half the money at the start and half at the end of six years, the loan would roll up to £137,459.
If the same borrowers have finances in place to meet half of the monthly interest payments, the debt rolls up less swiftly. In the first instance, where the loan is taken in one go, it would grow to £111,733 after 15 years.
Recent research by Aviva indicates that the use of lifetime mortgages has changed in recent years. More people, it says, are using the loans to help grandchildren get on to the housing ladder or to adapt their home so they can stay in them.
Dean Mirfin, a director of leading independent equity release specialist Key Retirement, says: ‘Housing wealth will play an important part in funding many people’s retirement.
‘Without using the value in their home, many will live through retirement with insufficient capital and income.’
Equity release is not for everyone and there can be stiff redemption charges if borrowers want to repay the loan. Aviva, for example, caps its charges at 25 per cent of the initial loan.
Family members also need to be kept in the loop for inheritance reasons. So independent financial advice is essential.