The level of flexibility available for Equity Release Schemes, also known as Lifetime Mortgages has changed beyond all recognition over the last decade. Previously a single lump sum was all that was available with rather onerous terms. Schemes now benefit from the introduction of features such as the ability to protect a certain percentage of the property value from day one, the ability to repay the lifetime mortgage at any time without penalty and drawdown facilities that take away the need for a larger lump sum than necessary to be taken at outset. Thereby reducing the amount of interest applied to the mortgage from day one.



Interest will be applied to the amount borrowed and will roll up over time, with your Lifetime Mortgage Scheme. Therefore the smaller amount taken at outset, the slower the interest charges will roll up.

The five key flexible features to consider are

- Drawdown Facility

- Early Repayment Penalties

- Increasing Cash Reserve

- Equity Protection

- Interest Calculation Method

Drawdown Facility

Drawdown facilities with Lifetime Mortgage Schemes, come in various flavours, but essential all provide a pre-agreed limit based on the value of your property and the age of the youngest applicant. With all Equity Release Schemes the lender will specify a minimum amount that has to be taken at outset, typically between £10,000 and £25,000 with the balance being available to call upon in the future. With most schemes the drawdown facility is available for a minimum of ten years, although drawdown facilities with an indefinite term are becoming increasingly popular.

Increasing Cash Reserve

An Increasing Cash Reserve is a type of Equity Release drawdown facility and is currently only offered by Prudential with their Increasing Cash Reserve equity release scheme. At outset a minimum initial release along with the maximum facility will be agreed for this scheme. Each year thereafter the drawdown facility will increase by 1% of the initial property value up the maximum allowed. For example for someone aged 65 and a property value of £250,000 the maximum lump sum would be £62500. However with the Increasing Cash Reserve Scheme, the maximum lump sum at outset would be £50,000 with the reserve facility growing by £2500 each year to a maximum of £87,500 at age 80+ (including any initial lump sum). For those that do not wish to delay the application until they are older and a greater percentage of equity is available, and who can foresee a greater need for equity in the longer term, this type of facility is ideal.

Equity Protection

An Equity Protection feature provides the option to select a guaranteed minimum value of either 10% or 20% of the original property value that will be returned to your estate. Protected equity options can reduce the maximum amount of equity that can be released. However most equity release schemes now price in an increase to the fixed interest rate rather than a reduction in the amount available to borrow when providing a Protected Equity Option. The increase to the interest rate is then applied to the initial loan and any further advances

Interest Calculation Method

Whilst not specifically a flexible feature, the way in which interest is applied to the mortgage can affect the rate at which interest rolls up. A monthly rate of interest is the most typical rate of interest advertised for Equity Release Schemes. However this is not the true rate as interest compounds monthly to produce a higher annual rate. For example a monthly rate of 6.4% which compounds to an annual rate of 6.65%. Therefore if a Lifetime Mortgage Scheme advertises an annual rate of interest of 6.55%, this product would be preferable by comparison to a monthly rate of 6.4%.

Early Repayment Penalties

Lifetime Mortgage Schemes are designed to last for the whole of your life, and so early repayment would not normally be a consideration. If repayment is a possibility, such as when selling up to downsize, the cost of early repayment can be considerable. Currently there is only one Lifetime Mortgage Scheme available in the UK which has no early repayment charge at any time and is provided by Coventry Building Society. With most other lenders the early repayment penalty falls in to one of two penalties. The first is a defined penalty of 5% of the total loan for the first 5 or 10 years. With the other being linked to the performance of a particular gilt, based on age at time of loan offer. Any early repayment charge depends on whether the redemption yield is higher or lower when the loan is repaid, than it was on the completion date of the loan. There is no charge if it is the same or higher. If it is lower, there will be a charge.

With an increasing level of flexibility now available with Equity Release Schemes, seeking independent professional advice is more important now than at any time in the past, and can potentially save you thousands in rolled up interest.