Anthony Beachey
Tim Leonard
Lifetime mortgages are the most popular form of equity release and can be worth considering if you’re an older homeowner in need of a financial boost.
As a lifetime mortgage is a loan that allows you to unlock the equity in your home without requiring you to move, it’s easy to see why it might appeal. However, there are several reasons why careful thought, as well as independent financial advice, is always required before taking out a lifetime mortgage.
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.
» MORE: Learn about drawdown mortgages
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.
» MORE: Other options to explore besides equity release
Image source: Getty Images
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