The loan is only repaid once the property is sold due to the death of the last surviving policyholder or they are moved out of the home and into long-term care.
It is worth noting if a couple take out a mortgage and one person goes into care but the other one remains in the home, then the mortgage will continue.
Interest is charged on the loan plus any interest already added, which means the amount a client could owe upon taking out such a product can increase quickly over time.
However, entry into the lifetime mortgage market by big lenders such as Legal & General Home Finance means interest rates have reduced since the early days of equity release.
Declines in product rates mean that the amount the loan will grow by has decreased in recent years. It will therefore take more time for the average loan to increase by as much.
Innovation has also given consumers much more flexibility.
For example, some lifetime mortgage products, including Legal & General’s Optional Payment Lifetime Mortgage, now allow consumers to make monthly repayments that can help reduce the amount of interest accrued.
Many other plans also allow customers to make partial repayments of up to 10 per cent per year with no penalties. Other options like income lifetime mortgages give customers the option to access their housing equity as a regular, fixed income rather than a large lump sum.
Busting equity release myths
Some advisers – and indeed their clients – may not want to consider the equity release market due to its reputation from the distant past.
While lifetime mortgages may not be suitable for every client, those who take the policies on can be assured two common myths are untrue.
Firstly, as long as the customer meets the terms and conditions, they will never be ‘kicked out’ of their home.
Unlike a conventional mortgage, lifetime mortgages are based on the value of the customer’s home and because with many mortgages the loan is not paid back until the customer moves into long-term care or dies, the customer is unable to default on the loan.
Secondly, all equity release plans approved by the Equity Release Council will benefit from the no negative equity guarantee safeguard. This ensures that a borrower or their estate will never owe more than the value of their home.
There is also a misconception that the unlocked equity can only be taken as a cash lump sum, making lifetime mortgages inflexible products.
In fact clients can opt to receive a regular income or smaller amounts, as and when they need.
Creating a lifetime mortgage service
Advisers considering entering the lifetime mortgage market need to decide how they will implement the service.