Lifetime Mortgages Explained

Posted by David Reed
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What is a lifetime mortgage?

A lifetime mortgage is a long-term loan secured against your home, and is repaid when you die or go into long-term care. It frees up some of the wealth you have tied up in your property and you can still continue to live there.

How do they work?

A lifetime mortgage is when you borrow money secured against your home, while still retaining ownership. Most lifetime mortgages have a fixed rate of interest, although some providers, such as Scottish Building Society, offer variable-rate lifetime mortgages which provide less certainty.

Unlike conventional mortgages, interest is charged on what you have borrowed, which can be repaid or added on to the total loan amount. You’ll never have to repay more than the value of the property.

You can also choose to section off some of the value of your property as an inheritance for your family.

When you die or move into long-term care, the property is sold and the money from the sale is used to pay off the loan. Anything left goes to your beneficiaries. However, if your estate can pay off the mortgage without having to sell the property, they can do so.

Why would you want a lifetime mortgage?

You may find that having paid into your property your whole life, most of your money is tied up in assets, meaning you’re unable to do the things you really want to in later life. If so, you may want to consider accessing this wealth in a flexible, safe way without having to sell your property and move.

Are you eligible?

If you own your own property and are aged over 55 then you are eligible to apply for a Lifetime Mortgage. The percentage of your property you can borrow against depends on your age. The older you are, the more you can borrow.

There are also minimum loan amounts – which can range from £10,000 to £45,000 – and your home will likely need to be worth a certain amount too (normally £70,000 to £100,000).

Is it right for you?

A mortgage with variable interest rates might not be suitable because the interest rate might rise significantly. However, one of the Equity Release Council standards states that if the interest rate is variable there is an upper-limit ‘cap’.

The different types of lifetime mortgages

There are three main types of Lifetime Mortgage:

An interest roll-up mortgage:

You get a lump-sum loan, where the interest payable is ‘rolled up’ over the full term. This means you don’t have to make any regular payments. The amount you borrowed, including the rolled-up interest, is repaid at the end of your mortgage term when your home is sold.

A drawdown mortgage:

This works the same as a Roll-up Mortgage except you choose to release the money as and when you need it. You can choose to have money in a reserve account ready to drawdown when you wish. Since you pay interest only on the money you’ve taken, the overall cost can be considerably lower.

An interest repayment mortgage:

This type of mortgage allows you to make voluntary payments towards paying off some, or all, of the interest during the life of the loan. Some of these plans have monthly payment options but you can decide not to make any payments at all if you don’t want to.

Benefits of lifetime mortgages:

  • Flexibility – There are plans where you can take as little as £10,000 tax-free and leave more funds in reserve for when you need it.
  • Maintain ownership – With all Lifetime Mortgage plans your property remains your own, you have just borrowed against it.
  • Security – You’ll never have to repay more than the value of the property.

Drawbacks of lifetime mortgages:

  • Cost – The amount you owe can add up very easily. In some cases, it may drain almost all the value of your home, and significantly reduce what you leave as an inheritance to friends and family.
  • Loss of means-tested benefits – Drawing extra money from housing equity may mean you lose eligibility for pension credit and council tax benefit.
  • Difficulty moving – moving can be problematic if the new property is more expensive than the equity remaining in your old one.

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