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Case Study

 

PENSIONERS BOOSTING INCOME

Jed Newton, May 2008
 
 
Mr. Smith, age 74 and Mrs. Smith, age 72 own their home that is worth £200,000 - they have no mortgage. However, they could do with some extra income and would like to help their grandchildren who are due to go to university.
 
This is a very common situation with a homeowner in an “asset-rich, cash poor” situation. The Smiths are sitting on considerable equity but are unsure how to access the cash in their home without risk.
 
One common solution that should be explored is a lifetime mortgage, where a lender will advance a proportion of the property value but the owner makes no repayments - the interest simply rolls up until the owner dies or moves into a care home, at which point the property is usually sold and the proceeds used to pay off the mortgage and the accrued interest.
 
The amount that can be advanced becomes larger the older the borrower is because the debt is likely to be collected sooner, meaning there is less risk for the lender.
 
Lifetime mortgages do not guarantee that there will be anything left from the value of the home to pass on to any beneficiaries - it is sold on death or when the owners move to a care home, and the debt plus interest is repaid. If there is any money left over it goes to the borrower’s estate. If house prices fall, there may be no money left to be bequeathed to any heirs after the property is sold.
 
Recently, however, several lenders have introduced “protected” mortgage schemes that guarantee to pass on a certain proportion of the property value to any heirs. They can choose to protect a chosen percentage of the property value to pass on to their children, grandchildren or whoever.
 
In the Smiths’ case, based on their current ages and assuming they do not want to protect any of their property value for their heirs, they could borrow up to 40% of the property value (the amount offered to a couple is always based on the age of the younger spouse). This equates to £80,000. If they were younger the amount would be smaller; if they were older they could borrow more.
 
Crucially, lifetime mortgage borrowers do not have to take one lump sum. They can opt instead for an income for life, or a combination of a lump sum followed by an income until they die or they can arrange an income drawdown facility.
 
The precise figures vary from lender to lender but if they wanted a lump sum - to buy a new car and give a few thousand pounds to their grandchildren, for example, the Smiths could borrow, say, £14,000, and still qualify for a regular income of around £400 a month - based on their £200,000 property.
 
There are more and more lifetime mortgage providers in the market and many have small print and exclusions that need an expert eye to decipher; independent professional advice is therefore essential.
 
We charge a fee, payable on completion of the scheme, this is typically 2.5% of the loan, subject to a minimum of £1,750, e.g. loan amount £60,000 the fee would be £1,750 (£1,250 increased to minimum £1,750). Depending on the scheme arranged fees may be subject to VAT. For lifetime mortgages we will refund any commission we receive from the lender.
 
Or, a fee, payable on completion of the scheme, that is typically 1.5% of the amount of the loan e.g. loan amount £60,000 the fee would be £900. This fee is subject to a minimum of £795. In addition, we will be paid commission from the scheme provider. Depending on the scheme arranged, fees may be subject to VAT.