If you are deciding on the best way to release equity from your home, you might find it interesting to compare Retirement Mortgages with Lifetime Mortgages.
Differences between Retirement Mortgages and Lifetime Mortgages
There is a difference between the way that interest is calculated on a Retirement Mortgages when compared to a roll-up Lifetime Mortgage:
- The interest on a Retirement Mortgage typically starts at a fixed rate which is guaranteed not to change for a set period of time – normally 5 years. Once the fixed rate period has come to an end, the rate of interest applied to the loan will depend on the lender’s Standard Variable Rate of interest at the time. This is will not be known when the loan is taken out and could therefore be higher or lower than the fixed rate.
- The interest charged on a Lifetime Mortgage is usually fixed until the end of the term which is the earlier of the last property owner dying or moving out of the home into full time care.
The interest rates charged on Retirement Mortgages tend to be lower than for Lifetime Mortgages (typically 2% per annum difference) because Retirement Mortgages are comparable to conventional mortgages and therefore follow similar terms.
The ways in which Retirement Mortgages and Lifetime Mortgages are calculated differs:
- Retirement Mortgages are based on a multiple of your retirement income (like traditional mortgages), and other factors such as affordability and ‘Loan to Value’ are taken into account to calculate the maximum loan amount.
- Lifetime Mortgage are based the value of the property and the age of the youngest homeowner to calculate the maximum loan amount.
Maximum Lending Available
There is a difference between maximum amount that you can borrow using a Retirement Mortgage when compared to a Lifetime Mortgage: the maximum amount that can be borrowed on a Retirement Mortgages can be much higher than for Lifetime Mortgages because Retirement Mortgages are based on affordability.
Early Redemption Penalties
If you need to redeem your loan early, you will need to be aware of the differences between Retirement Mortgages and Lifetime Mortgages:
- Retirement Mortgages have redemption penalties that apply during the fixed rate period of the loan which is usually the first five years of the term. After this period has ended, you will be free to re-mortgage without incurring a penalty.
- Lifetime Mortgages have early redemption penalties that apply for the entire duration of the loan. They are calculated on two different ways:
1. Fixed basis which is known from outset.
2. Variable basis which is dependent on the yield of 15 year gilts.
There is no maximum for the ages of borrowers on a Lifetime Mortgage whereas there is a maximum age for Retirement Mortgages which tends to be 80.
Retirement Mortgages are a relatively new product and so there tends to be less providers in the market that offer Retirement Mortgages when compared with Lifetime Mortgages.
A Home Reversion Plans involves selling part (or all) of your property to a specialist Equity Release company in return for a lump sum, or regular payments (an income).
How Old Do You Need To Be To Take Out a Home Reversion Plan?
You will need to be over the age of 65 to be considered for a Home Reversion Plan.
What Happens After You’ve Arranged a Home Reversion Plan?
One of the features of a Home Reversion plan is that you will still have the right to live in your home after you have sold it. The terms of your tenancy will be either on a rent free lease, or a minimal charge, and it will be for the rest of your life or until you leave to move – most likely, when you go into care.
What Happens When You Leaven Your Home or Die?
If you move out of your house or die, the Home Reversion Plan will be repaid. If this occurs soon after arranging you Plan, it is likely that the scheme could prove to have been an expensive way of releasing equity.
However, there is a high degree of certainty with Home Reversion Plans about the amount of money that will be taken from your estate in the event of leaving your house, or death, because you know exactly how much has been taken.
What Happens If You Want To Move Home?
Many Home Reversion Plan providers enable you to move home if you want to but this will be subject to the agreement of the provider: you will be unlikely to be able to move to a home that they may find difficult to sell, eg sheltered housing.
What Upkeep Do You Need To Make?
You will need to continue to insure your property, and ensure it is properly maintained whilst you live there.
How Much Will You Receive From A Home Reversion Plan?
The amount you will receive will depend on a number of factors including:
- Your age
- Your state of health
- The value of your property
You are likely to receive between 24% and 65% of the value of your house depending on your age (or a combination of the ages if the Home Reversion Plan is taken out with your spouse or partner). This is substantially less than the actual market value and the reasons for this are:
- You will not be paying any rent whilst you’re staying at your home
- The Equity Release company that has provided the money to you through the Home Reversion Plan may have to wait many years before it can sell your property and realise its investment.
If you are in debt to more than one creditor by more than £1,500, then a Debt Management Plan can be an option that you might explore. This article answers many of the Frequently Asked Questions (FAQs) about Debt Management Plans (DMPs).
What Is A Debt Management Plan?
A debt management plan is an arrangement that is made by a debt management company on your behalf to your creditors in order to change the terms of your debt repayment.
How Is It Debt Management Plan Arranged?
A debt management plan is arranged as follows:
- You consult with a debt management company and provide them with all the details of your debts.
- The debt management company negotiates with your creditors to freeze the interest being charged on your debts (which might be a temporary measure while the DMP is being arranged).
- The debt management company seeks to reduce your monthly payments by negotiating on your behalf with your creditors.
- Once the details are all arranged, you undertake to pay the agreed amount every month in order to satisfy your creditors and to pay off the debts.
Why Use A Debt Management Company?
By using a debt management company, you will empower them to handle negotiations with your creditors on your behalf and come to an arrangement with them about your payments.
Are There Alternatives To Debt Management Companies?
If you do not wish to use a debt management company you have two options:
Create Your Own Debt Management Plan
You can create your own debt management plan by negotiating directly with the financial organisations that you have money to. Most financial organisations are sympathetic to people who wish to resolve their debt problems and so you can often come to an arrangement with them.
However, many debt management companies have arrangements in place with many of the leading creditors in the UK and so they are best placed to carry out negotiations on your behalf that you may not be equipped to do.
Consult With A Debt Management Charity
There are a number of debt management charities that might be able to help you too.
How Much Do Debt Management Companies Charge?
Debt management companies charge an initial fee and then a monthly fee which is typically 20 per cent of your loan payments. Whether this charge is factored into your monthly payment and so you will not be paying an additional amount to them.
How Is A Debt Management Plan Calculated?
A debt management company will look for a debt management solution to work out how much money you can afford to pay on a monthly basis after taking into consideration your living expenses such as mortgage/rent, heating costs, council tax, food bills, etc. The objective of the exercise is to identify a monthly payment that you can afford. Once the figures have been finalised, the debt management company will negotiate with your creditors on your behalf to finalise a monthly payments that you can afford and that is acceptable to them.