I mentioned earlier that there are two main types of Equity Release plans, Home Reversions and Lifetime mortgage and today I’m going to deal with the specific options available with the Lifetime Mortgage.
So how do we choose the best option? Perhaps for most people, the starting point would be around how much money would they like to have.
There are two options, you can either take a capital lump sum or an initial sum of money and set aside additional funds in a ‘draw-down’ or ‘reserve’ account. So what are the advantages and disadvantages of each?
The lump sum option.
- This would generally be viewed as a one-off sum of money where clients would like to take the maximum available to them.
- Usually by taking the maximum, you can borrow more than with the draw-down plans.
- If a fixed rate product is chosen, the interest rate on all of the capital taken will be fixed for the duration of the lifetime mortgage.
- You have taken all of the money available to you, so you have total control of all the funds available.
- If you take more money than you actually require you will currently be charged a higher interest rate on the loan than you are likely to receive by placing the ‘surplus’ capital into a savings account.
- It is likely you’ll be charged a higher interest rate in order to obtain the maximum available and additional funds may not be available to you in the future.
- The equity (value) left in your property will be eroded quicker as you have taken a larger amount of capital out of the property. This will reduce the amount left to your beneficiaries.
- If you are in receipt of means tested benefits, you may have to provide additional information to the Department of Work and Pensions when you are assessed if you decide to keep a large amount in your bank account for a long period of time.
The draw-down or reserve option.
- You initially take the amount of money you require for your immediate or short-term goals and you set up a reserve or draw-down facility which means you can ‘borrow’ additional funds without further approval.
- The initial sum is often at a lower rate than taken with the lump-sum option. This means the equity in your property will not erode as quickly, leaving more for your beneficiaries in the future.
- The amount of money available in reserve is set at the outset which means you don’t need to have the house re-valued in the future. You therefore know in advance how much money you will have access to.
- When taking more money from this facility, the amount taken can be lower than the initial sum taken so you can come back in stages. Generally there are no charges for taking these additional funds.
- You only pay interest on the amount you drawdown, not the amount in the reserve account.
- Although available for the life of the mortgage, under certain circumstances, this facility could be withdrawn at any time by the Lender. Also, the total amount available may be less than is available with a lump-sum option.
- Although the interest rate on the initial sum taken is a known at the outset, the interest rate on future draw-downs would be set at the time when the money is taken. This rate may be higher or lower than the original rate with potentially different early repayment charges to the original advance.
- For some people, where property values are rising quickly, by setting the reserve when the property is initially valued, this might be seen as a disadvantage, especially if your initial loan was to finance substantial improvements to the property.
- This is just a general over-view of this type of facility and again, taking specific advice from our Specialist Equity Release Advisers will provide the most suitable option for you.