Enhanced equity release is also known as the ill-health or impaired lifetime mortgage and provides a larger maximum lump sum to homeowners with personal health issues. A standard lifetime mortgage uses a loan to value percentage based on the age of the youngest homeowner and property value to determine the minimum and maximum lump sums. For potential equity release applicants looking for the higher equity releases with health conditions it may now be possible to access more of their home equity during their lifetime.
Equity release companies such as Aviva, More2Life, Just Retirement and Partnership all offer enhanced equity release versions of their lifetime mortgage plans to provide a higher overall lump sum to homeowners who suffer from ill-health. Each company has its own underwriting criteria to determine their maximum equity release calculation formula. Therefore, it’s important to obtain independent advice from a specialist in the enhanced equity release field.
How Enhanced Equity Release Works
Lifetime mortgage lenders require homeowners to fill out a health and lifestyle questionnaire. The aim of the questionnaire is to determine if there is one or more health issues that can lead to a potentially lower life expectancy. Heart disease, cancer, obesity, diabetes, and other health conditions can end one’s life earlier than an average healthy adult of the same age. Lifestyle choices such as drinking, smoking, and not exercising can also put a strain on a person’s life. These issues and others are looked out for with the questionnaire.
Lenders who offer enhanced equity release products are investing in an earlier death. It is a cold way to put it, but true. The company is investing in a person dying sooner than the average healthy person of the same age in order to get their investment back earlier. This is similar to the concept of the enhanced annuity plans that people buy once they reach retirement & obtain a larger pension than someone in good health, as they are based on life expectancy.
Consider an example:
A person who is 60 years of age could live to age 86, or even a few years longer. A lender offers a lifetime mortgage which is repaid at death or when the person moves to a long term care facility. If the person stays in their home for the next 26 years, it is a long time for interest to accrue onto the principle loan amount. At most, a lender might offer 25% of the home value based on the interest rate to ensure the home does not end up with negative equity when it is sold for the repayment.
A person with a health issue of the same age might live only 15 years longer. Since the repayment occurs earlier it is possible to increase the initial sum as there potentially wouldn’t be same length, or amount of roll-up of interest. Therefore, the equity release provider can hedge their bets and offer a greater initial lump sum knowing that statistically they may not live as long and less time for the interest to compound.
This is how a lender will look at the health of a person to determine if there is an underlying cause that might return their investment earlier; therefore, keeping the interest accrued at a lower sum to avoid any negative equity issues.
Which Homeowners Qualify
The health of a person is one aspect of the qualification process. While it is used to determine if more than the standard equity release sum should be provided to the homeowner, age and property value factor in.
The age of the youngest person must be at least 55 years old to qualify and it also must be the youngest life that qualifies for the impairment being applied for. The properties location must be in the UK which collectively now includes England, Wales, mainland Scotland & some equity release lenders do operate in Northern Ireland. The minimum property value between all the enhanced equity release lenders is just £60,000 which most properties in the UK these days would qualify.
To understand whether you’re eligible for equity release and which products you qualify for, use our free smartER tool.
The older a person the fewer years one may have to live. Property value determines the funds available to be released as equity. A home worth £100,000 has less equity than a home of £500,000 – obviously. The calculation is fairly simple and straightforward in terms of property value percentage awarded as a lump sum. Therefore, in the early years of retirement most enhanced lenders will lend a lower release of equity than someone in there 70’s.
As there are different types of enhanced lifetime mortgages there can be other qualifications. An interest only lifetime ill-health mortgage has now become a really with some lenders including Aviva offering a voluntary repayment equity release plan which allows the homeowner to repay back upto 10% of the capital borrowed.
There is also the possibility of turning a standard mortgage into a drawdown equity release mortgage with the potential to increase the maximum sum available if there are proven ill-health reasons. An enhanced drawdown lifetime mortgage provides an initial smaller lump sum with an additional cash drawdown facility to take more funds at a later date, as & when required.
Advantages of Enhanced versus Standard Lifetime Mortgages
The main advantage of an enhanced lifetime mortgage versus standard equity release products is the increased maximum lump sum, or initial sum & drawdown facility provided by the lender. It is a mortgage that allows poor health to help the homeowner, rather than work against them. Therefore, someone who is not concerned over leaving their inheritance and has immediate pressing financial needs, the enhanced equity release plan fits the bill.
Receiving tax free cash is possible with both mortgages; however, someone with ill health may need more cash on hand for their retirement years to help with their treatment and possible disability. More treatments are becoming expensive and not covered under the NHS particularly those related to cancer. Obtaining treatment from a private facility in the UK or elsewhere may require more funds, hence a greater than normal release of equity maybe required.
As the release of equity is tax free, it can be used to help family or to take a once in a lifetime trip. For someone who is in poor health, continuing to work and save up for a trip can be difficult. By accessing equity, particularly more than a normal lifetime mortgage, there are more possibilities for the homeowner to live their last years comfortably rather than worrying.
Disadvantages of Enhanced versus Standard Lifetime Mortgages
Enhanced equity release interest rates on the whole tend to be higher than the standard equity release schemes. You are paying the privilege for a niche product which to the lender carries more risk to exposing its ‘no negative equity guarantee’. Therefore, the interest rate is customised accordingly & increased to match risk.
They can take longer to underwrite as most enhanced providers will request a GP’s report from the homeowners doctor. This is to ensure the details submitted are correct & is the basis moving forward. Once replied, the enhanced lifetime mortgage offer can be produced.
Enhanced equity release plans tend to be less flexible than their standard equity release counterparts. Although enhanced drawdown schemes are available, most enhanced equity release providers will only offer a single lump sum plan.