What is a lifetime mortgage?
A lifetime mortgage is a type of equity release, a loan secured against your home that allows you to release tax-free cash without needing to move out.
Lifetime mortgages are available to homeowners aged 55 or over. You can take the money as a lump sum or as series of lump sums. There’s nothing to repay until you die or move permanently into long-term care.
If you have the financial means, you can choose to pay off some or all of the monthly interest. It would reduce the amount of interest added over the life of the mortgage and reduce the amount you’ll owe in the end.
Whether you’re looking to pay off an existing mortgage, make some essential home improvements, or gift money to a family member, a lifetime mortgage could help.
How does a lifetime mortgage work?
Taking out a lifetime mortgage will only be an option if you are aged 55 or over and either fully or part-own the property you live in. Even though you’re borrowing against the equity that you have in your home, you are still the owner and responsibility for keeping it in good condition sits with you.
Interest is payable on the amount you borrow and rates may be fixed for the life of the loan, or could be variable. If you’re considering a variable rate, note that the Equity Release Council insists its members cap the rate to prevent costs going too high.
Interest on lifetime mortgages usually is rolled up and is repaid when the home is sold – typically when the last surviving borrower dies or moves into a care home. However, as you’re paying interest on the interest you have already accrued, and none of the loan is being repaid, your debt can be considerable. Alternatively, some plans allow you to make regular or ad hoc repayments to help reduce costs.
Taking out a lifetime mortgage with a provider that is a member of the Equity Release Council means you will be covered by a ‘no negative equity guarantee’, which ensures that your debt will never exceed the value of your home.
If there is money left over once the loan and interest has been repaid, this can be passed on as inheritance. However, this might be very little or nothing at all.
Are there different types of lifetime mortgage?
Lifetime mortgages are usually categorised according to how the equity that you release will be released (lump sum, drawdown etc) and repaid (rolled up, or part/full interest repayment).
Lump sum lifetime mortgage
As the name suggests, this type of lifetime mortgage will pay you a lump sum. You can use the money for whatever purpose you wish – for example, to cover medical or care expenses, home improvements or to pay off debt. Typically, interest on a lump sum lifetime mortgage will roll up to be paid off with your loan when you die or move into care and your home is sold.
Drawdown lifetime mortgage
If you don’t need a large lump sum, a flexible or drawdown lifetime mortgage – where you take regular or occasional small amounts, perhaps to top up your income, or for particular circumstances – may be more suitable. As you’re only borrowing what you need gradually, this can help limit the amount of interest you pay overall, compared with taking a lump sum.
Regardless of whether you opt for drawdown or take a lump sum, the money paid to you is tax free.
How much can I borrow with a lifetime mortgage?
The older you are, the more money you can borrow. Most providers will offer a fixed percentage of your property value based on your age. Some lenders may also offer larger sums to people with medical issues, either presently or in the past.
With an enhanced lifetime mortgage, the loan size you are allowed will also depend on your health. You may be able to borrow more money if you have a health condition, such as high blood pressure or diabetes.
How do I get a lifetime mortgage?
There are many providers that offer lifetime mortgages, which you can compare and research for yourself. However, because of the relative complexity of these products and the variety of factors involved, you can’t simply arrange a lifetime mortgage yourself.
Any provider you choose will need you, the potential borrower, to seek specialist equity release advice. If the specialist adviser then thinks equity release is suitable for you, you’ll be able to proceed. You will also need to get legal advice.
The costs involved in obtaining a lifetime mortgage
Unfortunately, there are usually costs involved in setting up a lifetime mortgage. These include:
Fees
This often starts with fees for advice from an adviser with an equity release qualification, although some organisations provide free advice, including debt charities such as StepChange. You will need to pay for independent legal advice as well.
You may also need to pay an arrangement fee, a completion fee and for a valuation of your property.
Interest
The interest that you pay on your mortgage is likely to be the most significant cost.
The following lifetime mortgage example provides an estimate of the amount you might owe when borrowing £50,000 and opting to roll up the interest:
- At an interest rate of 4%, the total owed would be £60,833 after five years, £74,013 after 10 years, and £93,423 after 15 years.
- At an interest rate of 5%, the total owed would be £63,614 after five years, £81,522 after 10 years and £104,046 after 15 years.
- At an interest rate of 6%, the total owed would be £66,911 after five years, £89,544 after 10 years and £119,831 after 15 years.
If you have an outstanding mortgage on your residence when you take out an equity release plan, you will have to use part of the money to pay off the existing balance. A lifetime mortgage calculator can prove invaluable in helping you work out all of these costs.
Can you pay off a lifetime mortgage early?
It might be possible to pay off a lifetime mortgage early, but you can expect a lender to impose an early repayment charge for doing so.
Pros and cons of lifetime mortgages
There are many benefits to lifetime mortgages, but plenty of potential drawbacks, which must always be considered too.
Advantages of lifetime mortgages
- Lifetime mortgages allow you to withdraw some of the wealth stored in your home without having to move.
- You can withdraw tax-free cash to supplement your retirement income, pay off existing debt, or to cover major expenses, such as private medical care or improvements to your home.
- Lifetime mortgages are regulated by the Financial Conduct Authority (FCA), an independent body that regulates financial services in the UK. You can complain to the Financial Ombudsman Service if you are unhappy with the service you receive from an equity release provider.
Disadvantages of lifetime mortgages
- The money you receive from a lifetime mortgage could have an impact on your eligibility for pension credit, savings credit, council tax discount or other means-tested state benefits.
- A lifetime mortgage will increase the size of your debt, and you’ll have to pay interest on that debt.
- If the proceeds from the sale of your home don’t cover the repayment of your loan and interest, your beneficiaries may need to use funds from your estate to cover the shortfall (a no negative equity guarantee should avoid this).
- You will need to seek financial and legal advice and pay a variety of set-up charges.
- Taking out a lifetime mortgage will reduce the amount your beneficiaries receive as an inheritance when you die.
- You may face hefty penalties if you decide to repay the loan early.
- Although most lifetime mortgages are portable, meaning you can transfer them to another home, in reality, your lender will have certain criteria you’ll have to meet. For example, you may not be able to move to a retirement complex or property that is in need of major renovation. You may also need to repay some of the loan if the house you wish to move to is worth less than your current residence.
Alternatives to a lifetime mortgage
If equity release is your chosen method of raising funds, a home reversion plan is the only real alternative to a lifetime mortgage.
Away from equity release, there are a number of options you might consider, including remortgaging to release equity. You could also downsize, selling your current home and moving to a cheaper alternative, to release some of the current equity in your home.
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Interest Only Lifetime Mortgages are similar to the Lifetime Mortgage being that you are able to access a Tax Free lump sum to do with as you choose. However, under the Lifetime Mortgage no interest payments are made and the balance of loan increases until the property is sold to repay the loan, whereas with an Interest Only Lifetime Mortgage you have the flexibility of protecting any remaining equity within your home by way of either:
A. Making the monthly interest payments, or
B. Allowing the monthly interest charge to be added to the loan and utilising a 10% per annum overpayment facility.
Therefore, opting for an Interest Only Lifetime Mortgage you are paying the chargeable interest and the loan balance remains the same. As with the Lifetime Mortgage , the loan is repaid out of the future sale of the property, for example, if you’re applying as a couple, when the surviving partner is admitted into long term care or sadly passes away.
Interest Only Lifetime Mortgages offer an alternative to those who wish to maximise the amount of inheritance they leave for their beneficiaries.
Interest Only Lifetime Mortgages differ dependent on provider and it may be possible to release up to 75% of the value of your property. Alternatively, initially a smaller amount may be released with the potential to borrow more at a later date. In order to qualify for making the monthly payments providers will need to be satisfied that your current income is sufficient whilst meeting all other criteria. However, it may be possible to choose your monthly payments, which can be anywhere between £25pm up the full amount of interest charged, or allow the interest charged to roll up utilizing the over payment facility as mentioned earlier. No affordability checks are required as any payment is classed as a ‘contribution’ towards the interest. Effectively, it could be classified as a ‘self-cert mortgage’.
Importantly, for Interest Only Lifetime Mortgages make sure you can always afford any agreed monthly payments as the loan is secured against your home and failure to keep up with the repayments may result in having your home repossessed. Furthermore, consideration should be given to meeting any required payments should one of you no longer be around due to death or long term care.
Speaking to our dedicated Equity Release Advisors will help you understand the advantages and disadvantages of Interest Only Lifetime Mortgages and will also explore and explain any alternatives
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FAQ
1.WHY SHOULDN’T I JUST STAY WITH MY CURRENT MORTGAGE LENDER?
Because that may cost you £000’s in the long run! Unfortunately, some mortgage lenders are great at attracting new customers. However, when its time to renew, these new clients, often get lower rates than existing customers!
Importantly, your existing mortgage lender can only offer you their own products. Furthermore, the majority will rely on their own automated valuation models (AVM), relying on market trends to calculate the current valuation of your property.
For this reason, allowing your current lender to utilise this system not only will they ignore any home improvements you may have made. This will also restrict your access to lower interest rates and reduce the amount that can be borrowed in cases such as debt consolidation.
Moreover, if you wish to contest a lower valuation on your property, your mortgage lender will normally make a make a charge for sending out an independent surveyor to assess the value.
2.WILL YOU CHECK WITH MY CURRENT LENDER FOR NEW PRODUCTS?
We wouldn’t be doing our job correctly if we didn’t.
Most mortgage lenders now offer us the ability to look at new products, known as product transfers, for existing clients. Therefore, we could compare what your lender will offer to remain against other products available to you. Therefore ensuring you are getting the right advice and saving where you can.
3.MY INCOME HAS CHANGED SINCE I TOOK OUT THE MORTGAGE.
If your income has changed don’t panic too much. Importantly, if your income has reduced we will still need to offer you a full advice process to see if we can make any savings for you. However, it may mean that the only option is to stay with your current lender but we will advise you accordingly and carry out the process for you.
If your income has increased, that can only be good news. We will supply all options available to you.
Should you have gone self-employed since taking out your original mortgage we could still probably help. Click here for more information
