A lifetime mortgage allows you to release a loan by using your home as security, and there is no requirement to repay the loan until you pass away or when you enter long-term care. This enables you to access some of the value locked in your property while still retaining the right to reside in it.
As people approach retirement age, they often find themselves with the majority of their wealth tied up in their homes. Lifetime mortgages offer a way to access this money without having to move out or sell the home. In this guide, we explain how lifetime mortgages work and whether they might be the right option for you.
How Does a Lifetime Mortgage Work?
A lifetime mortgage involves borrowing money against your primary residence while maintaining ownership. It allows you to potentially set aside a portion of your property’s value as an inheritance for your family.
Throughout the mortgage term, you retain ownership of your home and are responsible for its upkeep. Interest is charged on the borrowed amount, which can be repaid periodically or added to the overall loan balance.
The loan is typically repaid when the last borrower passes away or moves into long-term care. At that point, the property is sold, and the proceeds from the sale are used to settle the outstanding loan. Any remaining funds go to your beneficiaries. In cases where your estate can repay the mortgage without selling the property, they have the option to do so.
To safeguard against the possibility of your beneficiaries having to repay more than the property’s value, most lifetime mortgages come with a no-negative-equity guarantee, as per the Equity Release Council standard. This guarantee ensures that you or your beneficiaries will never have to pay back more than the value of your home, even if the outstanding debt surpasses the property’s worth.
How Much Does a Lifetime Mortgage Cost?
There are some additional costs that may add up to between £1,500-£3,000 even before you consider the interest of the loan. These costs include buildings insurance, legal fees and valuation fees, an arrangement fee and a completion fee.
Some mortgage advisers and brokers also charge fees but Deedle’s service is always 100% free. To chat to an unbiased mortgage advisor for free, simply fill in our quick form and one of our experts will get in touch promptly.
What Are the Different Types of Lifetime Mortgages?
Interest Roll-up Mortgage
With this type, you receive a lump sum or regular payments and are charged interest, which is then added to the loan. This means you do not need to make regular payments during the mortgage term.
The total amount you borrowed, including the accrued interest, is repaid when your home is eventually sold. It’s essential to understand the impact of compound interest with this option. The interest increases each year at an agreed annual rate, and in subsequent years, interest is charged not only on the original amount borrowed but also on the interest accumulated in previous years.
This compounding effect leads to a gradual rise in the amount of interest owed each year. This can be a good option if you need a lot of money in one go.
Interest-Paying Mortgage
In this plan, you receive a lump sum and have the option to make either monthly or occasional payments. Making these payments reduces or stops the compounding effect of interest roll-up, making it a more suitable choice for those who want to control the growth of their debt.
Additionally, certain interest-paying lifetime mortgages allow you to pay off a portion of the capital if you wish to further reduce the overall loan amount. Similar to the interest roll-up mortgage, the entire amount borrowed is repaid when your home is sold.
What Are the Eligibility Criteria for a Lifetime Mortgage?
To be eligible for a Lifetime Mortgage, the homeowner must be at least 55 years old, and the property must meet certain criteria set by the lender. Typically, the property should be of standard construction and have a minimum value, which is usually around £70,000. Lifetime Mortgages are a type of equity release, so you will also need to own your home to be eligible.
How Much Can I Borrow With a Lifetime Mortgage?
The amount that can be borrowed through a Lifetime Mortgage varies based on factors such as the homeowner’s age, the value of the property, and the type of Lifetime Mortgage selected. Generally, the older the homeowner and the higher the property value, the more they can borrow. Lenders usually allow borrowers to release a percentage of the property’s value, often starting at around 20-25% and increasing with age.
Certain providers may offer higher loan amounts if you have specific medical conditions or lifestyle factors, such as being a smoker. This varies between lenders, and is always worth checking before you commit to any one product.
What Are the Advantages of a Lifetime Mortgage?
The money released through a lifetime mortgage is tax-free, providing a lump sum or regular income without tax implications. On top of that, many lifetime mortgages include a “no-negative equity guarantee,” ensuring that the homeowner’s estate will never owe more than the property’s value, protecting beneficiaries from potential debt.
Borrowers can continue living in their property throughout their lifetime, maintaining a sense of stability and familiarity. Unlike conventional mortgages, there are also no monthly repayments required with most lifetime mortgages. This can be beneficial for individuals with limited income in retirement.
What Are the Disadvantages of a Lifetime Mortgage?
As the loan and accrued interest must be repaid upon the homeowner’s death or move to long-term care, the value of the estate left for beneficiaries will be reduced. This could be an issue if you want to leave behind a sizeable inheritance.
Receiving a lump sum from a lifetime mortgage may affect eligibility for certain means-tested benefits, as it could be considered as part of your assets. With issues like this, it can be a good idea to speak with a tax advisor.
If the homeowner decides to repay the lifetime mortgage early, such as through selling the property or refinancing, they may incur significant early repayment charges. Always check for hidden fees and charges before you sign any contracts.
What Are the Alternatives to a Lifetime Mortgage?
Home Reversion Plan
This involves selling a portion or all of your property to a home reversion provider in exchange for a lump sum or regular income. You can continue living in the property as a tenant, rent-free, until you pass away or move into long-term care.
Downsizing
Instead of releasing equity, you can consider selling your current property and moving into a smaller, less expensive one. This will free up funds without the need for a lifetime mortgage, and you can use the difference to support your financial needs.
Concluding Thoughts
A lifetime mortgage is a viable option for homeowners aged 55 or above to access the equity tied up in their property without the need to sell or move. It provides the opportunity to release tax-free cash, either as a lump sum or regular income, while retaining ownership of the property.
