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lifetime mortgages

Lifetime Mortgages

How does a lifetime mortgage work?

Here is a useful video that explains how a lifetime mortgage works.

The most popular type of equity release scheme is known as a lifetime mortgage.

This is the most popular type of equity release scheme, as it’s the most flexible and versatile option.

It’s easiest to think of a lifetime mortgage as a kind of long-term loan, secured against the value of your property.

The difference with this compared with regular mortgages or loans is that although interest is added by the lifetime mortgage providers (usually on a yearly basis), no repayments are due until the termination of the contract – which usually occurs upon death or the sale of the property.

As with all investment options, there are benefits and drawbacks to consider if you are thinking about approaching lifetime mortgage providers. 

What are the advantages of a lifetime mortgage?

Retaining ownership of your property

In the event that you wish to keep it in the family, sell early should circumstances change, or plan on yourself or family members continue to live there indefinitely.

Freedom to use your money

The money borrowed can be spent (or reinvested) however you choose, giving you freedom and flexibility.

Negative equity guarantee

Many lifetime mortgage providers offer a ‘negative equity guarantee’, ensuring that you won’t have to pay back more than you received when you eventually come to sell your property.

Inheritance planning

Some also allow you to portion and protect a percentage of the property’s value to gift as inheritance, or make partial repayments early should your circumstances change.

Partial repayments

some lifetime mortgages will allow you to repay some of the money that you have borrowed.  This will help increase the amount that may be available to your family when you pass on.

Here is a short video that explains what the advantages and disadvantages of Lifetime Mortgages are.

What are the disadvantages and cons of a lifetime mortgage?

Reduces your inheritance

Equity release schemes and lifetime mortgages, in particular, are likely to reduce the amount of inheritance you’re able to gift to family members and friends. However, this is less of a concern if the cost of imminent care needs is likely to reduce the amount you can leave when you pass away.

Impact on benefits and tax position

A lifetime mortgage can affect your entitlement to certain state benefit payments as well as your tax position – so it’s worth obtaining a clear picture of how enrolling on a scheme could affect your income situation before making a decision.

Accruing interest

Lifetime mortgages accrue interest – both on the mortgage itself and the interest added each year.

This significantly increases the amount you’ll have to repay later down the line. (Interest only lifetime mortgages can be taken out to alleviate this – as detailed below.)

Repayment

You may need permission or be forced to make repayment early should you decide to rent out your property or sell it before the agreed period of time has lapsed.

This can become rather complicated if you do change your mind or find that your circumstances change.

What are the different types of lifetime mortgages?

Primarily, there are two different types of mortgages that you choose between:

– An interest roll-up mortgage

This is where you get a lump sum at the start or you are paid a regular amount over a period of time.  You are then charged interest on the amount that is borrowed and this amount is then added to the loan. The effect of this is that you don’t have to make any regular repayments back to the mortgage provider.

The amount that you initially borrowed plus the rolled-up interest is repaid at the end of your mortgage term when your home is sold.

– An interest-paying mortgage

This is where you get a lump sum and make either monthly or ad-hoc payments to cover the cost of the interest on the amount borrowed. This reduces, or stops, the impact of interest rolling-up. In addition, some mortgages also allow you to pay off the capital.

The amount you borrowed is repaid when your home is sold at the end of your mortgage term.

An alternative to lifetime mortgage

A range of alternatives to lifetime mortgage products are available – further increasing the potential for complications and confusion as you make your decision.

Each has benefits and drawbacks of its own – but many have been developed to circumvent or alleviate problems that have been run into by traditional standalone policies.

One such example is the ‘interest only lifetime mortgage’ – which prevents the need for a huge repayment inclusive of interest on termination of the contract through low monthly repayments which cover interest accrued.

An interest-only lifetime mortgage also helps homeowners to protect a greater portion of their property for inheritance purposes. Another type of equity release scheme, known as a ‘home reversion plan has additional benefits for those looking to remain living in their property long-term.

What does a lifetime mortgage cost?

Like with many financial products, there are often costs involved with setting up a mortgage product.  In addition, there may also be other insurances and products that you need to purchase as part of your agreement to get the mortgage.

In our experience, these additional costs typically add up to somewhere between £1,000 to £4,000.

However, the price often depends on the amount you are looking to borrow.

Typically, the following costs may apply:

  • Buildings Insurance.  You may want to also take this alongside your contents insurance.
  • Solicitor and legal costs
  • Home valuation fees
  • An arrangement fee to the lender for the product.  These can vary greatly and an advisor can tell you what these are.  You can call 0800 4640 806 to speak to a specialist and find out what the current arrangement fees typically are.
  • A completion fee.  You normally have two options with this.  You can either pay this as a lump sum when your mortgage is set up or you can add it to the amount that you have borrowed.

You should note, however, that if you do look to pay off your mortgage earlier then the terms you originally signed up for, then you may be liable to pay an ‘early repayment charge.

Why is a lifetime mortgage a popular choice?

When the opportunity to put aside money to pay for care in the future has passed, the range of options for investments that don’t affect the quality of life and inheritance begins to narrow. Therefore equity release has become one of the most viable and attractive ways to fund care – and with good reason.

Equity release schemes enable you to retain ownership of your home and in most cases continue to live there.

Some people won’t be eligible for certain types of equity release schemes – or it may not be a suitable option at all.

For example, you may prefer to sell your property and move to sheltered accommodation, using the funds raised from downsizing to pay for additional care needs.

Your property may be held in trust.

If you are still paying the original mortgage on your home it will need to be paid off in full before you can apply for an equity release scheme. To discover more about equity release schemes and decide whether this may be a viable option for you, take a look at our handy guide here.

What is a ‘no negative equity guarantee’?no-negative equity guarantee

The Equity Release Council are the industry body for the equity release industry in the UK.  Any equity release plans that they approve have a no-negative equity guarantee’.

In essence, what this means is that you will never owe more than what the house is worth when you use a lifetime mortgage.

This is really important because, in the main, people don’t repay the loan until the property is sold, which happens when you either pass on or move into a care home.

When this happens, the provider that you took the lifetime mortgage out with will calculate how much is owed from the point you took out the loan up until the point a repayment is due.   They do this by adding on all the interest owed in the intervening years.

What happens if I owe more than my home is worth?

If the calculation from the mortgage provider shows that you owe more than your home is worth when it’s sold on the open market, the mortgage provider isn’t able to try and get any more money from your estate.  This is where the ‘no-negative equity guarantee’ kicks in.

In this circumstance, when the property is sold, the entire proceeds of the sale will be paid across to the mortgage lender.   Clearly, this also means that you will have nothing left to pass on to your family.

If you’re worried about the interest on Equity Release Mortgages and want to guarantee that you have something to pass on to your family, you always have the option to not ‘roll-up’ the interest.

This means that you can look to structure your loan like an interest-only mortgage, and opt to make interest payments throughout the life of the loan.  This allows you to keep the outstanding balance fixed rather than seeing it escalate with the interest amount rolled up.

The benefits of speaking to an equity release specialist

As well as the video above where Martin Lewis talks about why you should speak to an advisor before taking out an equity release scheme, we recommend you watch this really useful video from the government’s Money Advice Service where individual’s talk about the benefits of taking independent financial advice.

Questions to ask your adviser when discussing a lifetime mortgage

Many people that are looking to take out a lifetime mortgage will be doing so for the first time.  This is why we have set out some questions you should ask when you do speak to someone.

  • What happens if you decide to move home?
  • What happens to the mortgage if you pass away soon after taking out the mortgage?
  • If you do take money out of your hose, what impact could that have on any benefits that you receive?
  • If you feel that you may want to repay some of your loans early, make this clear to your advisor and ask what rates each of the shortlisted provider will charge you to repay the loan early
  • If you intend to use some of the money to modify for your home, to make life easier, ask if you can also apply for any local or national grants to fund the cost?
  • Ask that there is a ‘no-negative equity guarantee.   This is where you end up owing more than your house is worth.  You can read more about this below.

Speak to an equity release specialist about lifetime mortgages

To help our site users you can have a free consultation with an equity release specialist to help you better understand how it works and what your options might be.

To do so, you can book an appointment directly using the calendar below.  Just pick your preferred time and date and someone will call you to help.

 

Summary of this page

1 - What is an equity release calculator

An equity release calculator will tell you how much money you could receive as a tax-free lump sum. The amount is usually dependant on your age and the value of your house.

2 - What sort of interest rates are applied to equity release mortgages?

Interest rates vary and can be anywhere between 3% and 7%. You can call us on 0800 953 3792 and get information on the latest deals, as they can change every day.

3 - Is the money from equity release tax-free?

Yes, the money you receive is tax-free. However, if you are in receipt of means-tested benefits then these can be impacted. You can contact us on 0800 953 3792 and see if you would be impacted.

4 - What can you use the money from equity release for?

The money from equity release can be used for a variety of things. Typically it is used to pay for long term care, modify your home to help with later life living or even to treat yourself to a holiday of a lifetime and help your family financially.

5 - What are the different types of equity release mortgage?

The most popular type is called a lifetime mortgage. If you are over 65 then a home reversion plan might be a better option, Get in touch with us and we will be able to tell you what we think would be best for you.