This week Craig is joined by Equity Specialist, Mark Thompson to discuss downsizing protection with equity release.
What does downsizing protection mean?
Downsizing protection is about giving you the ability to transfer a lifetime mortgage to another property, without any charges.
Generally, lifetime mortgages are a long-term investment and if you decide to move, or pay off the mortgage within the first few years, you can be faced with high early repayment charges. But downsizing protection will mean you’re not penalised in this way.
A good example is if you need to move home – perhaps you’ve decided that you want to be nearer family. You may be able to transfer the mortgage, but the lender will want the new home to meet their criteria – if it does, you can keep the mortgage deal.
But if it doesn’t meet their criteria, downsizing protection means you can pay the lifetime mortgage off, free of any early repayment charges.
What kind of property would fail to meet a lender’s criteria?
There are lots of reasons a lender might decline a new property, for example if it isn’t of standard construction – it has a timber frame or a thatched roof, for example.
If it’s next door to a garage or shops or a pub, lenders might worry about its value moving forward. A mortgage provider wants to avoid lending against any property they think might be risky.
Why have downsizing protection?
Downsizing protection is included in a lot of lifetime mortgage products today, as a way of tempting clients to choose the deal. If you think that you might move home in the future, or generally want some flexibility, it can be very useful to have.
It helps protect the equity in your property too, to make sure that you are able to leave something to your children or grandchildren, because it won’t be eaten up by early repayment fees.
Generally, it gives you peace of mind that should circumstances change, you have the flexibility to move.
What happens if I’m moving to a less expensive home?
Imagine you have a £300,000 house and want to move to a £200,000 home. You can potentially transfer the lifetime mortgage if the new property meets the criteria.
But you might not be able to borrow as much against the new property, as it is less valuable. You may have to pay back, say £30,000 of your lifetime mortgage. In this scenario you would need to pay early repayment charges – but only based on the £30,000, which is obviously a lot less than on the full mortgage.
What do I need to consider with downsizing protection?
These products are always changing, so your downsizing protection might be slightly different to the next person’s. If you work with a Mortgage Broker they will ensure you fully understand the details, such as when the protection kicks in and how it works in practice.
A broker will also make sure that you are choosing wisely in the first place – is a lifetime mortgage the right choice for you? Could you release retirement funds in a different, more flexible way? We’ll explore all the options and recommend the most suitable solution.
