For many people aged over fifty-five, the prospect of surviving on their pension can be pretty bleak. However, for those who own their own home, equity release can provide an excellent way to supplement their pension income and allow additional funds for purchases, investment or planning for the future. Lifetime mortgages are the most common form of equity release and these types of plans can usually be divided into two main forms: the standard roll up lifetime mortgage and the drawdown lifetime mortgage. A lifetime mortgage calculator will usually provide information about either of these two types of schemes, so it is important to understand the differences and benefits both plans can offer.
The Standard Roll up Lifetime Mortgage
This type of lifetime mortgage is similar to a conventional mortgage with the exception that no monthly payment is required. The interest accrued on the loan is simply rolled up into the balance of the loan. The loan is only due for repayment when the home is sold upon your death or when you have moved into a long term care home. With this type of plan you can obtain a tax free lump sum, an additional monthly income or both. The lump sum can be used for any purpose whether that is paying off debts, making purchases, assisting your children or grandchildren financially or using it as a pension supplement.
There are a number of advantages and disadvantages associated with a standard roll up lifetime mortgage. These include:
• You are aware of the financial implications from the outset: There is a fixed interest rate which will not increase even if the Bank of England base rate adjusts. You need not worry about rising interest rates and your adviser will document the year on year impact of the interest rolling up and compounding on to the balance of the loan.
• There are no monthly payments: This type of arrangement allows you to obtain the finance you require without having to meet an income criteria or tie up any of your disposable income for repayments. This means that you can supplement your pension or increase your standard of living without worrying about compromising your income. The repayment of the loan is handled for you when the property is sold at the end of the lifetime mortgage.
• The interest is fixed: Although this can be an advantage in the case of rising rates. The rate is fixed even if interest rates fall. This can mean that over time your standard roll up lifetime mortgage could cost more than if it had been taken out at a later date.
• It is a lifetime product: The lifetime mortgage is designed to be in place for the remainder of your lifetime. Although some plans allow flexibility in transporting the plan across to a new property should you decide to move, if your financial circumstances change you could incur penalties and charges for early repayment.
• It can affect the estate left to your beneficiaries: Since the balance of the loan will continue to increase over time, this will affect the amount of money which is left to your beneficiaries.
The Draw Down Lifetime Mortgage
This type of lifetime mortgage is similar to a standard roll up lifetime mortgage, except that instead of taking a lump sum payment, a draw down facility is created. This allows the home owner to draw down funds as and when they are required. Again, this type of plan has associated advantages and disadvantages:
• You only pay interest on what you have drawn down: Unlike a standard roll up lifetime mortgage, where interest is calculated from day one, with a draw down lifetime mortgage you only pay interest on those funds which you have drawn down. You have the flexibility to call down funds as and when you need them and only pay interest in this event.
• No implications for lump sums: Many people are reluctant to accept a lump sum payment from equity release as it will compromise their eligibility for certain state benefits and assistance programmes, which are means tested. The draw down lifetime mortgage allows for funds to be available, but they are not an asset until they have been drawn down.
• You don’t know the full costs from the outset: You will be unable to calculate the long term costs of a draw down lifetime mortgage from the outset. Since the amount of money borrowed will vary, you will need to rely on annual statements to assess the balance of the loan.
When considering equity release the standard roll up lifetime mortgage or drawdown lifetime mortgages can represent the best possible deal. An equity release calculator can prove a useful research tool, but it is always best to consult professional specialist advice before making any decisions.