Lifetime Mortgage lending falls into two clear categories. Aspirational or need-based. Traditionally home improvements, garden landscaping, long haul travel (COVID dependant), gifting so the family can enjoy an early inheritance would fall into aspirational. Need-based, commonly to repay an outstanding conventional mortgage or other debts. A growth area this last year has been to fund later-life divorce. Here a Lifetime Mortgage can be used by one partner to fund the buyout and by the other to help buy a new home.
There are other areas where ER can be used now that modern plans are so flexible. We have one national lender that will allow a Lifetime Mortgage type product to be secured against Buy to Let property. This means a landlord can raise capital against his/her portfolio rather than selling at a time when it might not be convenient or advisable. No rental income checks, no affordability or stress testing and no requirement to make any payments!
Most modern plans will allow payments to be made to manage the roll-up of interest and indeed to reduce capital outstanding. Generally, lenders will allow 10% of the amount originally borrowed to be repaid every year without penalties. However, there is one lender that will allow up to 40% of the original amount borrowed to be repaid without penalty. This could be useful where customers know they will be in receipt of money in the near future but need to raise capital now and don’t want a long term commitment.
Early Repayment Charges are payable if you overstep the limits of your plan. Again, modern plans tend to have defined penalties that typically taper over 10 years, for example, 10% in year 1 tapering to 1% between years 10 to 15. If the customers have been paying down their mortgage using the allowed “ad-hoc” payments, and in year 10 there was £30,000 outstanding, the ERC would be £300. (Please see your Key Features Illustration for full details).
Another practical use is to repay bridging finance. People take bridging finance for many reasons but by its nature, it’s short term lending. Providing the age profile is right, younger applicant over 55, and the amount of borrowing is within the allowed loan to value, ER can be a great solution.
Remember. The house is underwritten, not the person. The average conventional mortgage duration is about 4 years. Lifetime Mortgage average duration is about 20 years therefore valuation is critical for a successful application.
Check out our previous article here.