Lifetime mortgages let you access the equity tied up in your home without having to move. The money you receive is tax free and can be used how you wish. When it comes to repaying the loan however, lifetime mortgages work in a very different way to residential mortgages.
The following information explains what lifetime mortgages are, how they work and how they compare to residential mortgages.
What is a lifetime mortgage?
Lifetime mortgages, commonly referred to as equity release let you unlock the money tied up in your home. There are no monthly repayments, you continue to own your home and have flexibility to move. Once you die or move into care, your property is sold and the lifetime mortgage repaid.
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How does a lifetime mortgage work?
With a lifetime mortgage, a loan is secured against your property in return for a tax free cash sum. Instead of monthly repayments, the interest compounds and is added to the loan. When you die or move into care, the property is sold and the loan plus interest accrued repaid.
As the interest is compounded either monthly or annually, lifetime mortgages are more expensive compared to residential mortgages and will impact your family’s inheritance. However depending on the type of lifetime mortgage you choose, there are ways you can reduce the amount owed and guarantee an inheritance.
What are the different types of lifetime mortgage?
There are several types of lifetime mortgage to choose from depending on your requirements:
Lump sum lifetime mortgage
Lump sum lifetime mortgages often referred to as a roll-up lifetime mortgages pay out a cash sum in one single payment. The interest grows and is repaid along with the loan once the last homeowner dies or moves into care.
Drawdown lifetime mortgage
Drawdown lifetime mortgages give you flexibility to release money in stages, leaving some in reserve to drawdown as and when you need it. The benefit of a drawdown lifetime mortgage is you only pay interest on the money release, not the funds held in reserve.
Interest only lifetime mortgage
Interest only lifetime mortgages give you the option to make monthly interest repayments. This will reduce both the size of the overall loan when it comes to repayment and the impact to your family’s inheritance.
Enhanced lifetime mortgage
Enhanced lifetime mortgages are designed for people with medical conditions and can offer larger cash sums with improved interest rates.
Protected lifetime mortgage
Protected lifetime mortgages let you protect a percentage of the value of your property, guaranteeing an inheritance for family.
What is the difference between a lifetime mortgage and a residential mortgage?
A lifetime mortgage is for life, with no fixed term and no monthly repayments. In contrast, a residential mortgage lasts for a specific number of years, during which monthly payments are required.
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||There is no fixed term – the mortgage lasts as long as you (and your partner if it’s a joint plan) live or move into permanent care.
||You agree a fixed term (i.e. 25 years) by which time the loan should be repaid.
||There are no monthly repayments, instead the loan and interest charged is repaid once you have died or moved into long term care and the property is sold. (there are plans that allow you to make repayments if you prefer).
||You pay monthly for the duration of the mortgage term.
The interest is added to the loan including any interest already accrued on either a monthly or annual basis – known as rolled up or compound interest.
With a drawdown lifetime mortgage you only pay interest on the money you have released, not the money held in the cash reserve facility for future use.
With a Repayment mortgage you make monthly payments against both the interest and the original loan.
With an Interest Only Mortgage you make monthly payments against the interest only and then pay off the original loan at the end of the term.
|The Interest Rates
||A fixed interest rate that is charged for the life of the mortgage. If you have a drawdown lifetime mortgage, you may be charged a different interest rate for each withdrawal based on the rates at that particular time.
||You can choose between either fixed or variable interest rates
||No assessment is made during the application as to whether you can afford the mortgage, unless you choose a plan with a monthly repayment option.
||Your financial situation is assessed to ensure you can afford the monthly payments.
Who qualifies for a lifetime mortgage?
To qualify for a lifetime mortgage, you need to be at least 55 years of age, a UK resident and own your own home. You can also qualify for equity release if you have an existing mortgage however this would need to be paid off with the money you release.
Lifetime mortgage providers also have a minimum property value threshold which varies depending on the company but is usually around £60,000.
Are lifetime mortgages safe?
Lifetime mortgages are safe as they are highly regulated by the Financial Conduct Authority. However it’s also important to choose a lifetime mortgage provider that is a member of the Equity Release Council. The EHC sets both product and sales standards for equity release, ensuring schemes are safe for consumers.
As part of these standards, the EHC stipulate that:
- Interest rates must be fixed or if variable, there must be an upper limit or cap that is fixed for the lifetime of the loan
- You must be able to stay in the property for life or until you move into care, providing you abide by the terms and conditions of your lifetime loan
- You have the right to move to another property as long as your provider is happy that the new property offers continued security on your equity loan.
- The lifetime mortgage must come with a ‘no negative equity’ guarantee. This guarantee ensures that if there are insufficient funds to repay the loan once the property is sold and solicitors and agents fees paid, neither you or your estate will be liable to pay any more.
Therefore with the watchful eye of the Financial Conduct Authority and the seal of approval from the ERC, you can be sure that your lifetime mortgage is secure and that you are in safe hands.
To read about other popular lifetime mortgage misconceptions, take a look at our common equity release myths.
Is a lifetime mortgage right for me?
An equity release mortgage could help you and your family in many ways, be it to live a lifelong dream or just make life a little more comfortable financially.
For example, you may want to:
Make home or garden improvements – perhaps a new kitchen, conservatory or patio. Or maybe you want to adapt and future proof your home, making it more accessible for later life.
Pay off outstanding debts or loans – or if you have an existing mortgage, you could use a lifetime mortgage to clear the outstanding balance. You would need to pay off your existing mortgage with the money you have released, however the remaining cash sum can then be used how you wish.
Help your family – by releasing equity to get them on the property ladder, assist with education, help raise grandchildren or use towards wedding fees. A so called ‘early or living inheritance’.
Enhance your retirement income – using an equity release lifetime mortgage to help supplement your funds and boost your pension pot or savings, making your retirement that bit easier.
Enjoy life – treating yourself to that luxury holiday, new car, caravan or motor home.
Whether a lifetime mortgage is right for you will depend on your personal situation. It will affect any inheritance you wish to leave for family and could affect any benefits you receive, so it‘s not a decision to take lightly.
Other options may be available to you such as downsizing which is why talking to a specialist like Age Partnership can help.
What questions should I ask before choosing a lifetime mortgage?
A qualified lifetime mortgage adviser will explain and advise you on all aspects of a lifetime mortgages so you can agree whether it is the right option for you.
But before agreeing to go ahead, it’s important to ask the following:
- Can you move and transfer the scheme to a new property?
- Will the lifetime mortgage affect any benefits you currently receive?
- What happens if you die shortly after putting the mortgage in place?
- What are the fees if you decide to repay the loan?
- Are there any conditions for continuing to live in your home?
- Is the provider a member of the Equity Release Council and are you covered by the ‘No Negative Equity’ guarantee?