What is a lifetime mortgage?
A lifetime mortgage is a mortgage with a difference; it gives you access to tax free money that is tied up in your home and there are no monthly repayments. Instead, the money you have borrowed plus the interest is paid back once you have either died, or moved into a nursing home and the property is sold.
Equity Release interest rates are higher because of this and the loan will affect any inheritance you leave your family, however it does give you the freedom to enjoy the hard earned cash that is locked in your home.
As a result, the equity release mortgage is starting to play a major part in many people’s financial plans for the future.
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How does this type of equity release mortgage work?
- Based on your requirements, age and value of property, a loan is secured against your home that provides a tax free cash sum.
- The interest is added to the loan every year however there are no monthly repayments to make.
- You continue to own your own home and have the flexibility to move, as long as the new property meets the approval of your equity release mortgage provider.
- Once you have either died or moved into long term care, the property is sold, the lifetime mortgage is repaid and any remaining funds are paid to your estate.
What are the different types of lifetime mortgage?
To cater for our varied lives and requirements, there are several types of lifetime mortgage to choose from:
Lump Sum lifetime mortgage
With this type of lifetime equity release mortgage you get a tax free cash sum in a single payment. There are no monthly repayments to make, instead interest is charged at a fixed rate on the equity loan until you either die or move into long term care, at which point the property will be sold and the loan plus the interest repaid.
Drawdown lifetime mortgage
A drawdown equity release plan gives you the flexibility to release your cash in stages, at a time to suit you. You simply agree an amount with your provider, release an initial amount and then drawdown additional cash sums as and when you need them. The benefit of a drawdown equity release mortgage is that you only pay interest on the money you have actually borrowed, so you won’t be building up interest on the money you haven’t touched.
Interest Repayment lifetime mortgage
An interest repayment plan works in a similar way to a regular lifetime equity release mortgage however you are able to make regular payments on the interest accrued, which will in turn reduce the amount of money paid back when the house is sold.
Enhanced lifetime mortgage
An Enhanced lifetime mortgage is specially designed for people with medical conditions. They can offer greater cash sums and at better rates, so this type of equity release mortgage could work to your advantage if you suffer from certain medical conditions.
Protected lifetime mortgage
With certain types of lifetime mortgage you can guarantee an inheritance for your family by protecting a percentage of the value of the property.
Take a look at our How does equity release work? page for more information on home reversion plans.
What is the difference between a lifetime mortgage and a residential mortgage?
If you own your own home you are probably very aware and have personal experience of how regular residential mortgages work. Lifetime mortgages however work in a completely different way, so it helps to understand these differences:
||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.
What are the advantages of a Lifetime Mortgage?
Before choosing a lifetime mortgage it is important to consider the following:
- You receive a tax free lump sum of money to spend how you wish
- There are no monthly repayments unless you choose a lifetime mortgage plan that lets you repay some of the interest
- You can live in your home for the rest of your life
- You continue to have full ownership of your home
- You benefit from any increase in the value of your property
- You will never owe more than the value of the property
- You have the flexibility to use the money as and when you like with a ‘drawdown’ facility
- You have the flexibility to move in the future
Things to consider
- Equity release interest rates tend to be higher
- The money owed can increase quickly as you pay interest on the interest already accrued
- It will reduce the value of your estate, affecting any inheritance you wish to leave for family – some lifetime mortgages will allow you to ring fence a percentage of the value of the property but this will reduce the amount of money you can release
- Early repayment charges may apply if you repay early
- Your entitlement to state benefits may be affected
Can I have a lifetime mortgage?
To qualify for a lifetime equity release mortgage you need to:
- Be at least 55 years of age
- Own your own home
- Have property worth at least £60,000
- Live in the UK or Northern Ireland
You could also be eligible for a lifetime mortgage if you already have an existing mortgage in place, however the outstanding loan would need to be paid off by the equity you have released from your home.
Couples can benefit from an equity release mortgage as long as both are at least 55 years old. The amount of money released will depend on the age of the youngest person.
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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 mortgage so you can agree whether it is the right option for you.
Before agreeing to go ahead, it is important that you understand the answers to the following questions:
- 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 pay off 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?
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 that little bit more comfortable financially.
For example you may want to:
Make home or garden improvements – You may want a new kitchen, conservatory or patio. Maybe you would like to adapt and future proof your home by making it more accessible, so you won’t have to worry about moving in years to come, perhaps when the stairs get a little difficult.
Pay off outstanding debts or loans – If you still have a mortgage outstanding, you may want to choose a lifetime mortgage to clear the outstanding balance. Having an existing mortgage doesn’t mean you won’t be eligible for equity release; you will just need to pay off your mortgage first with the money you have released and then the remaining cash sum will be yours to do what you want with.
Help your family – The cost of living and raising a family can be so expensive these days, so you may opt for a so called ‘early or living inheritance’ by using equity release to help your family get on the property ladder, assist with education, raising grandchildren or perhaps use towards wedding fees.
Enhance your retirement income – As a nation we are living longer lives, which in turn means that our retirement years could be longer too. Using an equity release mortgage therefore could help supplement your income and boost your pension pot or savings, to help make your retirement a little easier.
Enjoy life – You may just decide you want a lifetime mortgage so you can get that one thing you have always wanted or treat yourself to a luxury holiday, new car, caravan or motor home.
Whether a lifetime mortgage is right for you will depend on your personal situation. An equity release mortgage will affect any inheritance you wish to leave for family and could affect any benefits you receive, so it is not a decision to take lightly.
Other options may be available to you that could help such as downsizing but a specialist like Age Partnership can talk you through your options and answer any questions you may have on how to release equity from your home.
Are lifetime mortgages safe?
Lifetime mortgages are tightly controlled and regulated by the Financial Conduct Authority (FCA). In addition to the FCA, it is important to choose a provider that is a member of the Equity Release Council (ERC), so you can be certain the following safeguards are in place to protect you:
- All lifetime mortgage interest rates are fixed, or if variable, that there is an upper threshold that is fixed for the life of the loan.
- You have the right to remain in your property for life, or until you move into long term care.
- You have the right to move to another property subject to the new property being acceptable to your equity release mortgage provider.
- You are covered by the all important ‘no negative equity’ guarantee, which means that you will never owe more than the value of your home. Therefore if after the house is sold and the solicitors and agents fees have been paid there are insufficient funds to repay the loan, neither you nor your estate will be liable for any additional payment.
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.