LEGAL
Homeowners may be concerned that the
longer they survive the more the debt will increase possibly to a position where there is negative equity. Most reputable schemes cap the sum to be repaid to the sale proceeds of the home. The outstanding loan will be a debt of the estate and will reduce the amount of any IHT payable. One downside is that the homeowner
will never know with any accuracy how much will be outstanding on his or her death and this may make planning for the division of assets more difficult. Some schemes allow the homeowner to
draw down parts of the loan as and when they require them rather than having to take the whole loan at the outset.
Interest only lIfetIme mortgages This is a standard mortgage product where only monthly repayments of interest are made, the capital remaining outstanding until the property is sold. As with any mortgage the ability to borrow is linked to the income of the homeowner and in the instance of the more mature homeowner
this may well be pension and investment income. Earnings are generally discounted entirely as the lender will take the view that these will cease at some time. The benefits of an interest only lifetime
mortgage are that the loan is fixed provided that the monthly payments are made and more equity is kept allowing for greater freedom to raise funds in later life.
Home Income Plans This type of equity release plan has been popular in the past. The lender advances a loan to the homeowner by way of mortgage but the loan is not paid over as a lump sum but instead is used to buy an annuity which guarantees an income for the homeowner for life. The annuity received services the interest on the mortgage but the remainder belongs to the homeowner to spend as they wish. The capital, in the usual way, is only repaid from the proceeds of sale of the house following the death of the homeowner. The homeowner will retain all of the capital growth in the property but will not
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have a lump sum to spend. Bear in mind that annuity rates may not be attractive at the time the loan is taken out and will be fixed at the start. Inflation may eat into the value of the income and the income may reduce any state benefits to which the homeowner is entitled. It should be noted here that mortgage
based products do tend to bear a higher rate of interest than would otherwise be available to a younger borrower. Also there are set-up fees to pay including legal costs and valuation fees. Anyone considering one of these plans
should consider discussing the matter with family members to keep them in the picture as it may be that funds provided by family members may serve the same needs and avoid the home being partially sold off or encumbered by a mortgage.
Graham Dorman, Partner, Knights Solicitors.
www.knights-solicitors.co.uk
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PROPERTYdrum AUGUST 2011 55 aiic ARTWORK
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