Equity Release Mortgages – Lifetime Mortgages

Equity Release Mortgages (ERMs) also known as Lifetime Mortgages, equity release plans or equity release schemes, are a great way to help you if you need to raise your income, perhaps to supplement your pension; to increase avaialble cash for whatever reason; to transfer capital to assist with IHT planning etc.

Equity Release Mortgages (ERMs) are aimed at the older customer and enable homeowners without a current mortgage on their property to release some of the cash (equity) accrued over the years. They are also available for applicants who have a small existing mortgage. It is particularly customer friendly because there is no possibility of property repossession, the customer retains ownership of property and the loan is usually transferable to a new property should the applicant/s wish to move. Minimum age is 55-60. There is no requirement to make monthly repayments. The equity release mortgage, including accrued interest is simply repaid when the property is sold.

How can you get help?

Most good companies will arrange an appointment for you with an independent adviser (IFA) specialising in equity release to discuss your requirements. The decision of whether to take an equity release scheme is entirely yours. A good company will provide you with all the information you need to make an informed choice. After all, with over 30 different schemes to choose from it makes sense to review all your options before making a decision. And choosing the right plan can make a difference to you of thousands of pounds.

All advice provided is independent and impartial and not tied to any bank, building society or financial institution. The subtle differences between many existing schemes and the pros and cons of each can be explained to you.

The key featues of Equity Release Mortgages include:

  • No possibility of property repossession
  • Clients retain ownership of property
  • Deferred interest. No repayments on the loan during the life of the equity release scheme-the balance is repaid when either the applicant passes away or the home is sold and the applicant enters long term care
  • In the event of a joint application the equity release mortgage is repayable when both applicants have either passed away or entered long term care
  • In the event of negative equity, lender is responsible
  • Adverse credit/low income does not affect the applicant’s ability to qualify for the equity release scheme
  • Interest rate fixed for term of the equity release mortgage.
  • Funds released by an equity release mortgage can be used for any purpose, including purchase of further pension annuities.
  • Fast Completions

Save Money with a Flexible Mortgage

Would you like a mortgage that allows you to make monthly overpayments when times are good and skip payments when money is tight? And what if you could borrow back your overpayments at the competitive mortgage rate of interest?

So called flexible home loans were once available only from a handful of smaller lenders, now several high street banks and building societies have jumped on the bandwagon.

The ability to overpay your mortgage without penalty can save you a fortune in interest.

But are all flexible mortgages the same – and are they suitable for every borrower?

A truly flexible mortgage allows you to overpay, underpay, take payment holidays and borrow back any overpayments, with few or no restrictions. It also calculates interest daily and some come complete with a cheque book or cash card.

The daily calculation of interest is important with a flexible loan. If you make an overpayment, you want the amount to be credited to your account immediately, thereby reducing the debt and the interest owing.

Bank of Scotland, First Active and Scottish Widows Bank are among the lenders that offer fully flexible facilities, including bank accounts. The Woolwich Open Plan is made up of a normal mortgage account with a separate reserve facility. You can borrow from your reserve at the standard mortgage rate using a Visa Gold charge card which they will supply.

Today’s working patterns make it difficult for some people to stick to a rigid mortgage payment schedule. The self-employed, for example, may have an erratic income, which is best suited to a flexible mortgage. People who are paid bonuses can also use the money to make substantial overpayments and reduce their debt. Most flexible mortgages allow you to borrow back money that has been overpaid charging the normal mortgage rate.

Low inflation and relatively low interest rates have also boosted the popularity of flexible mortgages. When inflation is low, the real value of your mortgage debt is preserved, so it makes sense to pay it off more quickly. It is also a good way to save. A higher-rate taxpayer would have to earn interest of more than 10% to make saving more cost-effective than paying off a mortgage debt.

Mortgage Shortfall for 3 million homes

Anyone who has an endowment mortgage should have received a very important letter from their insurance company by Autumn 2000. Insurers have been ordered to begin the huge task of contacting the five million households with endowments as the full scale of the scandal over these investments has become known.

Falling investment returns mean that about three million households – representing 60 per cent of endowment policies – face mortgage shortfalls unless they start to save more. Experts say that homeowners aiming to pay off an average 1,000 mortgage may have to increase their home loans in full. The news will be a bitter blow for homebuyers who were told that an endowment would be cheaper than a traditional repayment mortgage.

Despite sharing these misgivings, the Financial Services Authority – the chief watchdog, which instigated the new year comminique from insurers – has refused to conduct an industry-wide review of the way endowments have been sold, in contrast to its treatment of personal pensions.

The FSA concedes that the lowering of growth projection rates to around 6 per cent means all endowments taken out in the late Eighties and early Nineties are no longer on target.

Despite widespread agreement that the ending of Miras (mortgage interest tax relief) from April 2000 removes the last remaining pillar supporting mortgage endowments, the controversial plans still account for a quarter of all new home loans.

The FSA has written to the chief executives of leading endowment providers demanding that they justify how they can continue to sell them and to detail improvements to make them cheaper and more flexible for borrowers. In addition, insurers have been told to set up telephone helplines for policyholders. In April, life offices will start to send out letters detailing in clear language the situation of individual customers.

Many advisers doubt that endowments will survive this latest controversy. Some say the Association of British Insurers – the sector’s trade body – may have dealt the final blow by requiring firms to establish that endowments are “demonstrably” better than traditional repayment loans.

So what should you do if you are faced with a shortfall? Certainly all the experts advise NOT to add contributions to an existing endowment. If the deficit is likely to be small, opening up a savings account may be sufficient. For larger sums, saving into an equity ISA will give you cheaper and better tax-free returns than an endowment. These can be available from 10 per month and the low cost index tracking products would seem to offer the best value. They can also be used to invest lump sums and are an extremely flexible way to save for any purpose.

The rise of the flexible mortgage

There are many different ways to make the biggest financial commitment of your life, and it is worth reviewing what is available and choosing the mortgage best suited to your needs.

With some loans, the interest rate you pay varies roughly in line with the Bank of England base rate, that is known as a standard variable rate (SVR) mortgage. With other deals, the rate is fixed at a certain level for a specified length of time, this is a fixed rate of mortgage.

There are also discounted and capped rates. With the former, the lender trims a certain amount off the SVR for a given length of time. With the latter, the cap means you have the security of knowing that the interest rate won抰 rise above a certain level, regardless of what happens to rates generally.

Good fixed and discounted deals are on offer because experts believe that, despite a string of increases, the long term trend for interest rates is downwards. This is because the government wants rates in Britain to converge those on mainland Europe, which are below 4%.

However, problems can arise when the period of the fixed deal comes to an end, some deals require you to revert to the lender抯 standard rate at this point. If rates have increased substantially, the leap in payments can be painfully high.

Many mortgage advisers suggest that you opt for a loan that does not include any lock in arrangements or redemption penalties. If you get a fixed loan without penalties, you can walk away if your decision proves to be wrong.

The latter half of the 1990s saw a revolution in the UK mortgage market. New types of loans appeared, known as flexible mortgages, which calculate interest in a different way and which, as the name suggests, offered increased flexibility to borrowers.

There are a number of variations on the flexible mortgage theme, but the core distinction from traditional loans is that money you pay against the debt is credited immediately. With other arrangements, this would happen only once a month or even once a year. Same-day crediting can cut a huge swathe through the total amount of interest paid and allow you to pay off the loan early. No penalties are charged if you do so.

With some flexible loans you can pay more than is required to service the debt and thereby build up a “credit” balance. You can use this subsequently if you need to take a break from payments. If you do not do so, you simply pay off the loan early and save more interest.

The most sophisticated loans are the so-called current account mortgages. This is where you pay your salary into a mortgage account, which provides a cheque book and which can also take care of standing orders and direct debits.

The thinking here is that, for that part of the month before you can draw funds out to meet your living expenses, the money is working to reduce the amount you owe. Drawings on the account gradually increase the debt again, so the amount you owe fluctuates, but the total interest you pay over the month will be lower.

The companies that offer these loans argue that they make your money work harder than a normal account. Their logic is that, if you have 1000 in your mortgage account which is saving you interest at say 7.74% it is doing more good than if it were in a savings account earning interest at 5%.

Because interest is being saved rather than earned, there is no tax to pay on the 7.74% saved either, making it a further advantage equivalent to earning almost 10% as a standard rate tax payer or almost 13% as a higher rate tax payer. An advantage really worth having over 25 years?

Flexible loans are now heavily promoted by new entrants to the mortgage market, where claims are made such as “traditional high street providers are in some cases, costing their customers almost 1,000 over the odds during the life of a mortgage.”

With some flexible loans, it is possible to borrow more than is required to buy the house. For example, Bristol & West Flex 3 mortgage offers a loan-to-valuation ratio of 85%. Those who borrow less than this amount have access to the balance throughout the life of the mortgage. So if the house you want to buy is worth 10,000, you can borrow up to 1,000. If, however, you only need to borrow 1,000, you have a 1,000 credit available.