Lifetime Mortgages: A Case Study
Joyce and Cliff were nearing 60 and thinking about retirement. They owned a property that was worth £200,00. They both had their pensions to live on but feared they would not be able to live the kind of retirement they wanted because of a lack of money.
They loved their home and had no desire to move out of the property. They had two sons, one in his late 20s and another in his early 30s. Both the sons had good secure jobs, so Joyce and Cliff were not worried about supporting their children financially, however they did want to leave them something behind in their will.
They considered equity release as an option.
What the Options AreJoyce and Cliff had decided they did not want to sell their entire property, they wanted the knowledge that they could leave some inheritance behind for their children and that they would not be using all of the money tied up in their property.
They had read about lifetime mortgages in the newspaper and wanted to find out a bit more about what they offered compared to other equity release products.
They went to visit a financial adviser to enquire about what their options were.
Joyce says: "I was a bit worried about taking out an equity release product I had heard about people losing their houses and I wanted to make sure we would be able to stay in ours."
They were advised that if they took out a lifetime mortgage they would be able to receive one tax fee lump sum or a regular income. They would be able to release between 18-50% of their property’s value.
How the Scheme WorksA lifetime mortgage is a loan that is secured on your property, interest is then added to the loan throughout your lifetime. The interest and the loan will be paid back when you or your partner dies and the property is sold.
Joyce and Cliff decided that they wanted to release around 30% of the value of their property. This would give them an attractive lump sum of £60,000. They decided that they did not want to release the money until they were 65 as this would occur less interest because they would be taking out the loan for a shorter period of time.
Involving the FamilyThe advisor was keen to involve the family in the discussions and requested a meeting with their two sons so they would also know what their parents were doing.
Both sons agreed and they had the process explained to them. The sons did not mind that their parents were using their property to fund their retirement as they both had their own jobs and houses. The advisor explained to the sons what would happen when their parents died and how their house would need to be sold to repay their debt.
The sons understood that this would dig into their inheritance by selling the house but they did not mind so offered their parents their full support.
Cliff says: "I felt a lot better about involving our children and it I was safe in the knowledge that they did not mind losing some of their inheritance."
Pros and Cons of Lifetime MortgagesThe advisor explained to Joyce and Cliff what the pros and cons of taking out such a plan would be. He explained that they would not have to pay back any of the money until they died or sold the property, they would also be able to retain full ownership of their property until they die.
They also discussed the downsides such as a lack of inheritance for their sons, the risk of having a lot of interest added to the loan and any charges they might incur for paying off the loans early.
Joyce and Cliff were happy with the advice they had been given and decided to go ahead with the lifetime mortgage.