It is never easy to think about the future in terms of care needs or not being able to live in your home. However, in order to make the right financial decisions to ease the burden on your family, potential future care needs must be considered. Lifetime mortgages are one option for over-55s to consider for their future to help provide them with a home and inheritance for their loved ones. Here is our expert guide to explain all you need to know about lifetime mortgages.
What is a lifetime mortgage?
A lifetime mortgage is a loan taken out against and secured on your home, freeing up some of its wealth, while allowing you to continue living there and experience the benefits of being a homeowner.
A lifetime mortgage does not need to be repaid until you die or else go into long-term care but allows for homeowners to ring-fence some of their property’s value to ensure a particular inheritance for your family members. Some providers have the liberty of offering larger sums to homeowners with particular medical conditions and also take into consideration lifestyle factors such as whether or not you smoke when considering your application.
Interest is usually charged on the loan – this can be repaid through arranged methods or else added onto the total loan amount repayable on your passing. When the time comes for you to move into long-term care, or else you pass away, the house is sold on your behalf. From there, the money from the sale is used to pay off the loan – anything left over from the sale goes to your beneficiaries as normal.
Loans can be taken out as an individual or else by two or more people; in the case of multiple people, the loan remains in place until the last individual person dies or goes into long-term care.
Equity release schemes such as lifetime mortgages have bucked the trend of the older generation struggling to take out loans and mortgages by introducing schemes where age is no barrier to accessibility, allowing borrowing from 55 years to upwards of 90.
Which lifetime mortgage is right for me?
Lifetime mortgages can be taken out in different forms and paid out in different ways. The most basic form of mortgage is, of course, a lump-sum loan, tax-free and has interest ‘rolled up’ over the full term of the loan. This means that there is nothing to pay for the rest of your life. Drawdown loans offer more flexibility. With drawdown mortgages, you are able to borrow a smaller amount to begin with, and if necessary, you can borrow further down the line as required.
Generally speaking, there are two different ‘types’ of lifetime mortgage that you can take out, with different costs that you can choose from. The first is referred to as an interest roll-up mortgage and refers to a loan that pays out a lump sum or regular monthly amount. Interest is added to the value of the loan, ensuring that regular repayments do not need to be made.
When the house is sold at the end of the mortgage term, both the amount borrowed and the rolled-up interest is repaid to lenders. Some lenders offer a more flexible loan, enabling you to make voluntary payments up to the value of 10% of your initial loan balance each year. These can be carried out without the added detriment of early repayment charges. Loans like this one, of course, come with some restrictions: usually, the minimum amount you can borrow is £20,000 while the maximum amount depends on a number of factors, including (but not limited to) your age, the value of your property and the status of your application. Any remaining equity after the property has been sold remains within your estate or with your beneficiaries.
The second type of lifetime mortgage is an interest paying mortgage is a more cost-effective method of equity release, as it allows borrowers to manage the loan by paying off associated interest charges each month.
Assuming you keep up with interest repayments, the amount you borrowed on the commencement of your loan should never increase. Interest paying lifetime mortgages can also be portable mortgages – meaning that, providing that the mortgage meets the lenders’ criteria, it can be moved from one property to another.
If you find yourself in a situation where you no longer wish to make interest repayments, then some lenders will allow you to switch your mortgage from an interest paying mortgage to a roll-up mortgage. However, it is wise to get advice prior to taking out the loan if this is something that you think you may well decide in the future. Needless to say, the advice and assistance of a mortgage broker would be invaluable when exploring the options associated with a lifetime mortgage.
Remember that monthly interest payments must be repaid and kept on top of. Otherwise, the balance on the loan will increase significantly.
Who can get a lifetime mortgage and what will it cost?
Lifetime mortgages are directed towards the older generation over the age of 55, for a duration of around 25 years, in the sense that they will last a lifetime. However, primarily because of the financial crisis, some lenders are able to offer lifetime mortgages that continue for a maximum of forty years. If you’re looking for equity release under 55 then with the help of a broker you may need to consider a loan or remortgage.
As a rule of thumb, these lifetime mortgages are likely only to be offered to borrowers who have at least 40 years of working life left, meaning that they can also be suitable for people in their thirties. However, equity release officers are generally quite strict about their lending criteria, with the vast majority of lenders having a minimum age.
There are a number of things you should consider when weighing up the benefits of taking out a lifetime mortgage loan and how cost efficient it will be is definitely one of those things. You should make sure you are aware of all of the charges before going ahead with it. Your home will likely be valued prior to acceptance of a lifetime loan, so valuation and legal fees are certain additional costs.
Speak with an equity release advisor
Taking out a lifetime mortgage could be risky if you don’t get the right advice, so ensuring you speak to a qualified advisor to help you set up the scheme is quintessential in making sure that you get the right deal. Doing so might well incur a cost, so this should be factored in.
An arrangement fee to the lender for the loan itself might also be a cost that you have to take into consideration before applying. Completion fees that can either be added to the cost of your mortgage or else paid off upon completion of the mortgage are another fee to bear in mind.
Check to make sure that any mortgage you do take out has reasonable early-repayment charges, should the worst happen and you need to sell.
What do I need to get a lifetime mortgage?
If you are looking to reinvest some of the equity held in your property, for whatever reason, then a lifetime mortgage may well be for you. The requirements for getting one are minimal. Owning a property that has been recently valued and being of a particular age are the only legitimate requirements for acceptance, although acceptance naturally depends on your own personal circumstances and the conditions of the specific lender.
Speak to an independent mortgage broker or a financial advisor with a background in equity release to find the best deal for you, before taking out a lifetime mortgage.
What are the advantages of taking out a lifetime mortgage?
Lifetime mortgages are designed with the older generation in mind and ensure that money can be released as a tax-free lump sum, with no limitations on what the money can be spent on. Depending on the type of lifetime mortgage that you take out, it is possible to make full monthly payments on the interest accrued on the loan. This means that you are able to keep the loan at the same amount for the duration of the loan and ensuring that you know exactly how much money you will leave behind for your beneficiaries.
Continue to live in your home
Unlike home reversion plans, taking out a lifetime mortgage does not involve selling a percentage of your home in exchange for the loan. The lenders recover their money when the mortgage ends and you as a homeowner retain full ownership of the property and can continue to live in it. One of the factors for verifying your eligibility for a residential mortgage is both a credit check and verification of your income, but this is not the case as far as lifetime mortgages are concerned – it is only the value of the property and the age of the borrower that is taken into consideration as qualifying factors for successful eligibility.
A borrower who has a large amount of equity in a property but whose income does not support this may have to downsize in order to release the equity that they need for day to day costs of living. In these circumstances, a lifetime mortgage could be used to release this money, both allowing them to stay in the property as well as ensuring that their day-to-day lifestyle is improved exponentially. Upon the borrower’s passing, the loan will be securely covered by the value of the house.
While the idea of having a carefree and relaxing retirement may well sound appealing, take into consideration that any money you borrow through a lifetime mortgage lessens the amount of money you can leave to your loved ones after you have passed on. Remember: by taking out this loan, you are agreeing that your home will be sold at the end of the loan period.
What are the disadvantages of a lifetime mortgage?
While the advantages for taking out a lifetime mortgage appear to be on the forefront; there are still some factors to take into consideration that may well be seen as negatives.
If you choose to take out a loan through a lifetime mortgage, it could considerably affect the amount of money you have to leave as an inheritance to your offspring and family members, depending on the amount of money you choose to borrow. This is particularly the case if your property is the most significant portion of your estate.
If the combined cost of the equity you borrow and the accrued interest amounts to more than the selling price of the house, your surviving family members might find themselves in a position where they owe money to the lender. Such an issue can be avoided by ensuring that your mortgage has a no-negative-equity guarantee from the Equity Release Council. This ensures that you never owe more than the value of your property when you make the decision to use a lifetime mortgage.
The Equity Release Council also protects you with a ‘security of tenure’ which gives you the right to live in your home for life.
Tax & benefits
Taking out a lifetime mortgage can also affect your tax position and whether or not you are entitled to means-tested benefits, such as pension credit and council tax benefit. Making sure you know and understand the implications that a lifetime mortgage could have on your means-tested benefit is essential prior to taking out the loan.
While these mortgages can provide a very useful lump sum to borrowers, they can actually be at the detriment to the borrowers because of the difficulty associated with leaving them. Should the borrower want to pay off the loan in advance of its expiration – that is, when the house is sold and, the loan repaid. Many lenders have large redemptions fees to do so, making it much more difficult to retain your investment.
Additionally, lifetime mortgages that do not allow for monthly interest repayments should be taken out with caution. For these type of lifetime mortgages, the interest is added onto the original lump sum taken out as a loan on a cumulative basis. Using basic numbers as an example, taking out a loan of £100,000 with 10% interest will accumulate £10,000 worth of interest in the first year, meaning the loan will now amount to £110,000. Another year down the line, the interest of 10% will now be £11,000, and so on until the end of the mortgage duration. Due to the nature of the repayments, it’s clear to see how this loan could end up being substantially higher than the initial loan.
To stay safe and ensure you don’t accrue unnecessary costs, ensure that you take our your mortgage through a company that is part of the Equity Release Council, who promise a ‘no negative equity’ guarantee. To find out how much you could get use our free equity release calculator.
Are there any alternatives to a lifetime mortgage?
If a lifetime mortgage isn’t something that appeals to you, there are alternatives that offer similar perks. If you have surplus retirement income and can afford monthly repayments, then a mortgage loan or else a credit card loan may well suit your needs. Such loans ensure that your inheritance is protected and unlike equity release schemes, roll-up interest is not accrued. Naturally, you should consider the implications of missed payments, particularly if you have taken out a substantially sized loan.
The most obvious alternative to releasing equity that is often overlooked is downsizing your home. Usually, this is an overlooked alternative due to sentimentality associated with a home but doing so can raise the additional money you need to live comfortably. While this may mean you have less space, it can ensure a reduction in debt and help you release any much-needed cash.
A home reversion plan, an alternative to a lifetime mortgage, allows you to release equity to buyers for less than market value. You are then able to become a tenant in the house, rent-free. When you die, move from one property to another or sell the house, the lender then gets their investment back.
How to find the best lifetime mortgage for you?
As a borrower, only you know what kind of lifetime mortgage is the right one for you. Taking the time to find a mortgage broker who specialises in lifetime mortgages that can advise you on a loan that suits your needs is beneficial to borrowers and eliminates the risk of taking out a suspect loan.
Equity release can be used to pay for a number of different things, from holidays to home improvements. Some people use their lifetime mortgage payments to put aside to pay for care homes should they need them in the future. The average cost of care has spiralled out of control over the last five years and the cost of a year in a care home can amount to over £50,000. Being prepared can’t hurt.