Lifetime Mortgages

Lifetime mortgage is a name commonly given to the type of equity release loan available to retired home owners who wish to unlock the money tied up in their house. These loans are not usually repaid until the property is sold, often due to the demise of the homeowner or the need to go into long term care. At this stage the loan is repaid from the proceeds of the property sale. These type of loans originated in the 1960s whereby a loan normally up to £30,000 was secured against a retired person's property whereby the interest at that time was eligible for tax relief. The capital released purchased an annuity that repaid the interest on the loan and the amount left over after repaying loan interest provided a regular income. The original loan used to buy the annuity was repaid from the sale of the property. These schemes were only practical for persons over the age of 75 because annuity rates are progressively higher for older ages. Now that mortgage tax relief has been abolished these schemes are generally no longer viable. During the late 1980s a number of new lifetime mortgage schemes were introduced by well known building societies for the home owners aged over 60. Typically loans would be offered up to 50% of the property valuation irrespective of the borrower's age. Interest payments would be rolled up on top of the original loan and the total repaid on the sale of the property. Up until around 1988, property prices had consistently out performed mortgage interest rates by a comfortable margin. So even with interest compounded on top of the original loan, the total mortgage debt was expected to shrink in relation to the increased property value. Alas, this was not to be, the conservative government engineered huge interest rate increases during 1989. Consequently mortgage interest payments reached a peak of up to 16%. This resulted in thousands of property repossessions and many homeowners unable to maintain their repayments handing in their keys. The resultant downward spiral of property values caused the spectacle of a new phenomenon known as 'negative equity'. Negative equity is the term attributed to house values falling below the level of the mortgages secured on them. The future possibility of negative equity worried retired homeowners with high interest rolled up on their lifetime mortgages. This had a profound effect on the fledgling life time mortgage market and the schemes sold at the time were branded. However, the real culprit was in fact government orchestrated massive interest rates in order to curb inflation. Conclusion New life time mortgages have all sorts of safe guards including the facility to fix the rate of interest for life and no negative equity guarantees. The marketing of equity release products is now regulated by the FSA (Financial Services Authority) and advisers must pass appropriate examinations and fulfil rigorous conditions to be authorised. Also equity release firms should abide by the code of conduct laid down by SHIP (Safe Home Income Plans) These days there are numerous types of Equity release schemes such as: Interest only repayment Interest roll up Fixed Interest roll up Income schemes Fixed interest repayment Draw down Mortgages Reversion plans Part reversion schemes

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