Legal & General Home Finance offers a Payment Term Lifetime Mortgage (PTLM) designed for homeowners aged 50 and over. This later life mortgage solution helps individuals access their home equity while managing interest payments in a structured way. Although a PTLM is a lifetime mortgage, there are differences which we will discuss throughout this article.
This is where the equity release industry has been heading over recent years as it tries to position products where client needs are situated. This ultimately helps potential borrowers by offering a wider range of solutions, allowing themselves to make a more informed decision based on their financial requirements This is achieved through detailed consultation with a whole of market financial adviser who will assess the current financial situation of each client including affordability.
What is a Payment Term Lifetime Mortgage?
A PTLM is an equity release product that like any conventional mortgage allows homeowners to release capital from their property by way of a 1st legal charge on their property. By doing so, this allows a lender – such as Legal & General Home Finance to release a tax-free lump sum based on the home owner’s personal circumstances.
However, PTLM is unique in that it helps borrowers access property wealth earlier – from50, rather than 55 – and offers a tax-free cash lump sum in return for fixed monthly interest repayments for a chosen payment term (before age 75).
Borrowers can then choose to make voluntary repayments in retirement if they wish, but unlike a Retirement Interest Only (RIO) mortgage, they’re not required to make payments for life. Once the client stops making contractual interest payments, the interest is added to the total amount owed and is typically repaid from the sale of the home when the client passes away, or moves into long term care.
Key Features of the PTLM
- Tax-Free Lump Sum: Borrowers receive a tax-free cash sum, usable for various purposes such as replaying an existing Interest Only Mortgage, a new property purchase.
- Monthly Interest Payments: During the agreed payment term, borrowers must make monthly interest payments to the lender, which helps in managing the overall amount borrowed by maintaining a level mortgage balance for this period. This feature, coupled with the income and affordability assessment, potentially allows homeowners to borrow more compared to other lifetime mortgage options. This will be more significant the longer the committed payment term.
- End of Payment Term: After the payment term ends, the plan transforms into a standard lifetime mortgage where interest payments are no longer required, and is added to the balance of the mortgage. However, if the homeowner wishes to continue making payments, they have the option of making up to 10% per year voluntary payments on the original amount borrowed. The total loan amount is typically repaid from the sale of the home, after the last borrower passes away, or moves into long-term care.
- Affordability Assessment: Borrowers must pass an affordability assessment based on their income, so we can be confident they can maintain the monthly interest payments throughout the initial payment term.
- Higher Loan-to-Value Ratios: PTLM products often offer higher loan-to-value (LTV) ratios compared to standard equity release products due to the commitment to monthly interest payments. This means that you may be able to borrow more compared to a typical lifetime mortgage.
- Risks: Your home could be repossessed if you fail to make the mandatory monthly interest only payments on time and in full to the lender.
Standard Lifetime Mortgage
A typical lifetime mortgage also allows homeowners to release equity from their home, but operates differently from a PTLM:
- Tax-Free Lump Sum or Drawdown: Similar to PTLM, homeowners can receive a tax-free lump sum, however they may also choose a drawdown option, where they can take smaller amounts as and when needed. The drawdown option provides greater flexibility when the full amount isn’t need in one withdrawal, leaving the option to take further payments in the future.
- No Monthly Payments: Unlike PTLM, it is not mandatory for borrowers to make monthly interest payments on a traditional lifetime mortgage. Instead, interest compounds over time and is added to the loan balance. However, Legal & General Home Finance was the first lender to launch an Optional Payment Lifetime Mortgage (OPLM) . However, all equity release plans must have the option of being able to make up to 10% voluntary payments each year back to the lender without any penalty applying. These ad-hoc payments are a way of keeping the loan balance in check.
- Repayment: The total loan amount, including compounded interest, is typically repaid from the proceeds of the sale of the property once the last borrower has passed away, or moved into long-term care.
- No Affordability Assessment: Because there are no mandatory monthly payments, borrowers do not undergo a full income and affordability assessment, although this will be looked at as part of assessing your options from the outset. This makes it suitable for those who aren’t necessarily concerned over their inheritance, or simply don’t have the required income or certainty to maintain fixed regular payments to the lender.
- Lower Loan-to-values: From a lender’s perspective, due to the compounding effect of the interest, typical lifetime mortgages often have lower initial borrowing limits compared to PTLMs.
- Risks: Unlike the PTLM plan, there is no risk of repossession on a standard lifetime mortgage related to making payments.
PTLM Illustration : Sophia and Richard
In this example scenario Sophia and Richard, are aged 56 and 55, live in Leicestershire and have owned their home for 32 years. Their property has seen a significant escalation in value over the years and is now valued at £330,000. With their children now having grown up and left the family home, they wish to make improvements to their home and pay off a small loan.
Income and Goals: Both homeowners are employed (Sophia part-time and Richard full-time), they want to ensure financial security as they approach retirement. They need to borrow £120,000 for home improvements and debt repayment. They didn’t qualify for a Retirement Interest Only (RIO) mortgage due to the "first death stress" test, which assesses affordability based on the surviving partner's income.
- Choosing PTLM: A PTLM presented an alternative solution to their needs. By making monthly interest payments until they retire, they avoid the first death stress test of a RIO mortgage. Their combined salary of £80,800 allows them to borrow the required amount with monthly interest payments for a 14-year term. This plan enables them to future-proof their home and secure their financial future without the burden of indefinite payments or the constraints of their retirement income. (source: Legal & General Home Finance)
PTLM vs. Typical Lifetime Mortgage: Which is Right for You?
Advantages of PTLM:
- Higher Borrowing Limits: Due to mandatory monthly payments, the Legal & General Home Finance Payment Term Lifetime Mortgage plan can offer potentially higher loan-to-values, meaning a greater maximum borrowing capacity.
- Controlled Interest Accumulation: Monthly payments help manage and maintain a level mortgage, thus preventing interest from compounding yearly during the initial payment term.
- Affordability Consideration: Affordability based on current income levels be that from your job or current retirement income may allow for higher loan amounts
Advantages of Typical Lifetime Mortgage:
- No Required Monthly Payments: Ideal for those with limited or fixed incomes, or no wishes to leave a legacy, as there are no mandatory payment commitments.
- Simpler Eligibility: No affordability assessment means it’s accessible to a broader range of borrowers and less paperwork (e.g. proof of income).
- Flexibility: Options like drawdown equity release plans provide flexibility in accessing funds as needed, plus the ability to make ad-hoc payments whenever needed.
Comment from Andrew Gilbert, Product Director, Legal & General Home Finance
“Legal & General's Payment Term Lifetime Mortgage offers more choice for homeowners who are sitting on equity in their homes but can’t access this because of their age and borrowing needs. While not suitable for everyone, lifetime mortgage solutions can be an important consideration as part of a holistic approach to financial planning. For homeowners weighing up their choices, it’s worth speaking to a mortgage broker or financial adviser to be clear about all the options available to them.”
For a more personalised view, please speak to your independent equity release adviser on 0800 088 5930 who will be able assess your requirements and recommend a suitable solution based on your personal circumstances.
