The recent launch of Legal and General Home Finance’s Interest-Only Lifetime Mortgage has generated a lot of media commentary. The Optional Payment Lifetime Mortgage plan aims to address some of the issues surrounding the plight of over 1.6 million interest-only mortgage prisoners.
But is the product worthy of all the fuss? Here we discuss the merits of the Optional Payment Plan and its timely launch - at the dawn of the Retirement Interest-Only Mortgage era.
The term ‘Interest-only’ has been synonymous with the economic crash over a decade ago, when poor lending eventually led to a tougher stance by the Financial Conduct Authority (FCA) against interest-only, and lending into retirement generally. There has been a slow re-birth of these products and credit must go somewhat to the equity release industry endeavouring to find alternative solutions for people still requiring interest-only payments on mortgages into retirement.
The forerunner to this was Stonehaven with their innovative Interest Select range which allowed homeowners to take a lifetime mortgage secured against their property and allowing them to choose how much interest they wished to repay. The major advantage was that there were NO income or affordability checks and the term was unlimited. Importantly, they offered a ‘get out of jail’ card by allowing borrowers the option of switching to roll-up, thus ceasing regular payments.
People previously spurned by the banks now had an interest-only solution to borrowing in retirement, whilst at the same time protecting their inheritance. These Stonehaven Interest Only plans have now been superseded by the Retirement Advantage range, who’ve taken these Interest Select products to a new level; improving with new fixed 8-year early repayment charges, downsizing protection, 3-year early repayment waiver and optional drawdown facility.
This takes us into 2018 with a new lifetime mortgage company seeking the grasp the potential of the interest-only market, particularly with the advent of the new breed of Retirement Interest-Only Mortgages (RIO’s) on the horizon.
Legal and General historically launched their range of plans by picking the best features from its competitors’ products, then improving them as it gained experience within the lifetime mortgage market. This L&G Optional Payment Lifetime Mortgage seems to follow this trend, with similar features to the existing Retirement Advantage Interest Select range and adding its own features.
(I will be writing a fresh article comparing these two products shortly, consumers can then see the differences and similarities, to aid research - link to follow).
Where do Legal and General See A Gap in the Interest Only Market with Their Optional Payment Lifetime Mortgage?
Following the FCA’s permissions for Retirement Interest-Only Mortgages (RIO’s), Legal & General’s OPLM plan highlights the fact, there are already solutions within the equity release industry to the interest-only mortgage time-bomb. It also addresses the issues that RIO’s still pose, as they do not completely solve the lending into retirement problem. There will still be many consumers who do not meet criteria, or for whom RIO mortgages don’t provide the guarantees and security a lifetime mortgage provides.
Nevertheless, RIO Mortgages will have their part to play and the L&G OPLM can provide a flexible alternative for those requiring an interest only lifetime mortgage for the following reasons:
- No income or affordability check requirement
- Security of fixed monthly payments into retirement
- Lifetime fixed interest rates to protect against future rate rises
- Maintaining the mortgage, even if opting to cease payments in the future
- Retain the family home, should a partner die, or move into care
- Protect against repossession in the event of non-payment of the mortgage
- Mandatory advice from a fully qualified and authorised individual
So, just when you thought Legal & General would jump on the bandwagon and join the road to RIO, they’ve bucked that trend by launching within the existing FCA approved lifetime mortgage range. However, I’m sure there are plans ahead from Legal and General with RIO in mind as intimated recently by their CEO Steve Ellis here.
Effectively, L&G are providing not just a stepping stone for those jumping off the residential interest-only time-bomb, but also acting as gateway into the lifetime mortgage market. Those residential mortgagors that have switched to equity release on an interest-only basis, can later on switch to roll-up of interest, still the most popular form of equity release scheme. Fascinatingly, all this equity release innovation is providing consumer choice and bridging the gap between residential and equity release lifetime mortgages.
We have discussed the merits & rationale behind the decision by Legal & General to launch its own Interest Only Lifetime Mortgage. Let’s now analyse the product itself and how its flexibility can be tailored to suit an individual’s retirement mortgage requirements.
Introducing the Optional Payment Lifetime Mortgage Plan
This Legal & General interest-only mortgage comes in various guises by hijacking the existing L&G lifetime mortgage product range – namely the Flexible, Flexible Plus, Flexible Max and the Flexible Max Plus. The difference between the plans are the amount each product will lend (loan-to-value) and the corresponding interest rate each plan therefore attracts. Effectively, the higher the loan required, the higher the interest rate becomes. The lowest rate comes via the L&G Flexible Option Payment Plan.
Legal and General plans already provide an option for making repayments. These are the popular optional voluntary partial payments available across its current lifetime range, on an ad-hoc basis and with NO penalty. Therefore, an element of discipline is required to control the future balance.
However, the OPLM plan differs from the existing plans as it requires a regular monthly payment of interest, the level of which is pre-determined by the homeowner. These fixed monthly payments continue for the payment term selected, or until the last survivor has died or moved into care.
What are the L&G OPLM Interest Rates?
Its equity release interest rates are based upon which of the four Flexi plans have been selected. However, across each plan are an additional range of options which also affect the interest rate charged - cashback and set-up fee. Selecting a 2% cashback would increase the interest rate, whilst opting to pay a £599 application fee, will reduce the overall interest rate. This comes down to choice and discussing these options with your equity release adviser will enable you to tailor your plan accordingly.
Another factor affecting L&G’s interest rates is location. Properties within London & the South East (LSE) attract a slightly higher interest rate than those of the rest of the UK (RUK). For example, the L&G Flexible plan currently starts with an interest rate of 3.86% MER within LSE, but the RUK has a comparable 3.84% MER. This differential becomes larger as we move up the LTV range to the L&G Flexible Max Plus where LSE has a lowest rate of 5.42%, but RUK is at 5.37%.
The table below shows the minimum interest rates across all 4 plans currently…
What are the Monthly Payments on the L&G OPLM?
Legal & General will now accept monthly payments on this range of interest-only mortgages on a regular basis and payable by direct debit. The level of contribution is solely determined by the applicant from the outset and can be positioned anywhere from a minimum of £25pm upto 100% of the interest charged each month. The main feature is that NO income checks are necessary, nor affordability assessment required by the lender. This means the tiresome process of unveiling wages slips, SA302’s or pension statements/forecasts are unnecessary.
The monthly premium selected by the applicant will importantly determine how the future balance will look. For instance, if 100% of the interest charged is repaid monthly back to L&G, then the balance will remain level for the duration of the payment term. This is ideal for those maybe looking to protect their inheritance, or wishing to retain as much equity in their property, should they need to access additional capital later in life.
Alternatively, should a monthly payment be selected that’s lower than the interest charged, then there will be an element of roll-up within the balance. This will mean the difference between the amount repaid and the interest charged will be added to the mortgage balance each month, thus compounding over time. This will obviously result in an escalating balance, albeit lower than otherwise have been should no payments have been made at all. Therefore, gauging the level of contribution is very important and must be analysed ahead of any final decision to ensure awareness and the effects on the estate. Requesting a Key Facts Illustration from your equity release adviser, will evidence the effects of this payment decision.
How Much Will Monthly Payments Cost?
This depends entirely upon how much you borrow against the other variable factors mentioned previously; location, age and property value.
As an example, someone age 60, with a London property valued at £450,000 borrowing £65,000 and wanting to make the full interest-only payment on the Flexible plan would cost them £209pm (4.0% APR).
The same client requiring £130,000 would now only be eligible for the Flexible Max Plus plan (due to LTV) and hence the full monthly payment would be £591.50 (5.6% APR).
Evidently, rate does have a significant bearing on cost, hence the amount required should be carefully considered, especially as the OPLM plan comes with a drawdown facility anyway.
What is the Mortgage Term and How Long Can Payments be Maintained?
As the L&G Optional Payment Plan comes under the realms of Lifetime Mortgage criteria, the term will run for the lifetime of the homeowner and continue until death, or a move into long term care. Should this be a joint application, then the loan will continue until the death of the second individual. At that point the property is sold, and the amount outstanding is repaid to the lender, with any amount left over passed into the estate.
The payment term itself can be selected by the individual from the outset. Payments can either be over a specific term, or for the lifetime of the loan. In anticipation, term can be aligned to changes in future income and/or certain lifetime events. For instance, if a term of 15 years was selected, the fixed monthly direct debit payments would then continue for 15 years, upon which time they would cease.
Note – repayments cannot be restarted once they have stopped under a fixed term instruction.
However, should a lifetime term be selected from inception, then payments will last for the duration of the plan’s existence. The advantage with this choice of payment term is that termination of the monthly payments can still be affected at any time, with NO penalty. Whereas, if a fixed term was chosen, and payments still wished to be continued, there is no choice in the matter; they end. Therefore, for those with uncertainty over the length of the payment term required, it would make sense to opt for the lifetime option.
Upon missing 6 monthly payments, Legal and General Home Finance will automatically convert the interest only plan into roll-up and cancel all subsequent monthly payments. Again, there is no going back to monthly payments once this change has been made. The six missed payments do not have to be consecutive.
However, once payments have ceased, another repayment option comes into force. As mentioned earlier, current LandG Home Finance plans have an Optional Voluntary Partial Payment facility included. This allows upto 10%pa repayments based on the original amount borrowed and can only be made on an ad-hoc basis and with a maximum of four payments per annum at a minimum of £500 each. Therefore, even if monthly payments have ceased, there is still an option to make overpayments back to L&G to control the future balance. Great news!
How Much Can I Borrow?
Optional Payment Lifetime Mortgages use the loan-to-values (LTV’s) of the existing L&G product range (apart from the Premier Flex). Therefore, based upon age of the youngest at application, the maximum equity release loan will be calculated based upon a combination of age, plan selected and property value. The Flexible plan has the lowest LTV at age 55 which is 11%, with the highest LTV being 54% from age 85+ on the Flexible Max Plus scheme.
The minimum loan available is £10,000, with loans being available over £750,000 on a case-by-case basis. The minimum property value acceptable is £100,000 and again, properties valued over £4m are acceptable, albeit upon referral to L&G underwriting. For flats and maisonettes, it should be noted L&G will only accept 85% of its value for calculation purposes and ex-local authority properties attract a minimum property valuation of £150,000.
How Does the OPLM Drawdown Facility Work?
All Legal and General’s equity release plans come with drawdown, should the maximum LTV not be taken initially. Therefore, in the previous example should only £65,000 be taken, yet the maximum within the Flexible plan range was £72,000, then a drawdown facility will be created for £7,000. This amount is available in the future in minimum amounts of £2,000 a time and is not charged interest until withdrawn.
There are no further admin charges upon drawdown, however on each drawdown the interest rate charged will be the rate applicable at the time of withdrawal. Interestingly, with the Optional Payment Plan for any drawdown taken you can choose a different repayment strategy to that of the original. Therefore, if 100% of the interest charged was selected at inception, you can choose to pay either £0 towards the interest on the new drawdown resulting in interesting rolling-up, or choose to make a payment between £25pm upto 100% of interest charged again.
Who Will Benefit from this L&G Interest Only Lifetime Mortgage?
This product is specifically designed to capture the hearts of the 1.6m+ maturing residential interest-only mortgage customers, with no clear mortgage repayment strategy and wish to remain in the family home. By L&G providing choice and control it will allow homeowners to design a plan around their change in circumstances that inevitably arise at, or in retirement.
If nothing else, the new L&G range of interest only lifetime mortgages brings a new alternative to the equity release table and a plan that provides clients with a disciplined approach to maintaining their mortgage balance on a level basis over an unlimited term.
Here at Equity Release Supermarket, we have always embraced new products and innovation within the industry and actively help lenders seek and develop new products. The Legal and General Optional Payment Lifetime Mortgage, albeit not unique, certainly adds variety and lower interest rates to the range of interest only lifetime mortgages currently available. We are sure to see lenders launch further products in 2018 what is turning out already to be a record breaking year for equity release!
If you wish to discuss any aspect of this Legal & General Equity Release article, please call the Equity Release Supermarket team on FREEPHONE 0800 783 9652 or email [email protected]