A house is the biggest purchase most of us will make in our lifetime. This means there’s a lot of money tied up in our homes - tens or even hundreds of thousands of pounds.
A lifetime mortgage is a form of equity release where you release equity from your home. The debt becomes repayable when you die or move into full-time care, usually from the sale of your home.
If you want to free up some of that cash without having to move, you could consider equity release. The most common type of equity release is what’s called a lifetime mortgage.
But is equity release through a lifetime mortgage something you should consider? What even is a lifetime mortgage?
Let’s dive into the nitty-gritty details.
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A lifetime mortgage is essentially a loan that’s secured against your home. It lets you unlock some of the value of the property as tax-free cash, ready to spend on anything you like.
A lifetime mortgage is designed to run for the rest of your life. Unlike with other loans, you don’t actually have to make any monthly repayments unless you choose to. Instead, the loan is paid off in full when you die or move into long-term care. The money to do this comes from the sale of the house, with any leftover going to beneficiaries named in your will.
The amount of money you can release depends on a few factors, including how old you are, how much your home is worth and whether or not you want to make repayments. You can usually release between £10,000 and £100,000 in the form of a loan.
How these loan repayments work is that interest builds up over time. This interest is charged on the amount you’ve borrowed, then it’s up to you whether you pay off some or all of this interest as you go or have it added to the total loan amount due after you pass away.
In order to make a lifetime mortgage worthwhile for you, and the lifetime mortgage company, your property would have to be worth a minimum of £70,000 (although this can vary from company to company).
As a consequence, it is very important to get your home valued if you are considering a lifetime mortgage. This will save any wasted time further down the line if the lifetime mortgage company was to reject your application due to the value of your property.
There are different lifetime mortgage plans to meet different needs. You can choose to release the cash all in one lump sum, take smaller amounts at regular intervals or a bit of both.
The two main lifetime mortgages you’ll have to choose from are:
? Interest roll-up mortgage. Whether you choose a lump sum payment or smaller regular payments, the interest is added onto whatever you borrow. You don’t have to pay it off as you go as all debts are paid when your house is sold after your death.
? Interest-paying mortgage. You pay off any (or all) interest owed in monthly or ad-hoc payments. This stops interest from ‘rolling up’ and can help you keep your repayment figure stable - this makes things like working out inheritance easier.
Equity release of any kind, lifetime mortgage or otherwise, comes with its own pros and cons. While a good option for some, it completely depends on your personal circumstances.
There are eligibility criteria for lifetime mortgages. While these can differ slightly between lifetime mortgage providers, you can generally expect the following:
Even if you are eligible for a lifetime mortgage, take time to carefully weigh up your options.
There’s a whole host of reasons why a lifetime mortgage might work for you - you want to free up some cash to help your family get on the property ladder or contribute to a wedding, pay for care, or even just treat yourself in your retirement. And you can do all of this while still owning and living in your own home, or even moving home if you so choose.
However, there are some disadvantages of lifetime mortgages and equity release, in general, to weigh up too. As well as the positives, remember that:
Debts quickly build up. Lifetime mortgages typically have very high-interest rates. Even if the interest rate is fixed, the amount you owe could very quickly build up and drain all remaining value from your home. When the property is sold, all the money will be used to pay off the loan, and nothing will be passed onto your beneficiaries.
Debts can be passed on. If your lifetime mortgage doesn’t have a ‘no negative equity guarantee’ then you could end up owing more than the value of your home.
This debt would be passed onto your beneficiaries instead of any inheritance. Always insist on a lifetime mortgage having this guarantee to prevent this from happening.
Equity release affects benefits. Be aware that releasing equity from your home could come at the cost of any means-tested benefits you claim. If you release equity it could mean you are no longer eligible for pension credit or council tax benefit.
The pros and cons have to be carefully weighed while you’re doing your retirement planning. Remember, it’s not just about you. Your decision could affect the rest of your family too.
Historically there have been concerns with regards to lifetime mortgages, but since the Financial Conduct Authority (FCA) took control of regulating the sector, we have seen some significant changes.
All advisers have to be qualified, experienced and employers have an obligation to maintain ongoing training. As a consequence of the FCA now being involved in the lifetime mortgages industry, there is a much clearer path towards compensation if you have been a victim of rogue advice or mis-sold a product.
There are numerous reasons why the bar is set relatively low with regards to a lifetime mortgage loan to value figures. One of those reasons is that many people choose the rolled-up interest option; therefore, there needs to be a significant buffer between the initial loan, interest and the value of the property.
The other reason is that regulations protect homeowners from falling into negative equity with their lifetime mortgage. As a consequence, if in theory, your property was to fall into negative equity, then it would be the lifetime mortgage company who would foot the bill.
The mortgage affordability test is there to run the rule over those making monthly repayments. Those who choose a lifetime mortgage with rolled-up interest, paid off at the end of the term, don’t make any monthly payments so, therefore, there is no need for a mortgage affordability test.
This is one of the main reasons why home reversion schemes and lifetime mortgage schemes are so popular amongst those aged over 50.
If you have sufficient income to pass the mortgage affordability test, then there is no reason why you would not be able to obtain a traditional remortgage deal (subject to age). The problem for many people is the fact that in their later years, although we are all working longer, they will see a reduction in their regular income.
As a consequence, many people will find it difficult to pass the mortgage affordability test as they approach part-time or retirement from work.
In theory, if you are locked into relatively high mortgage interest rates and you have seen a reduction in your income, you would struggle to pass the traditional mortgage affordability test.
Thankfully, the authorities do have scope to offer remortgages on reduced interest rates for those “locked” into high rate mortgages. If this is something you are struggling with, a lifetime mortgage may be an option although you may also be able to switch your high rate finance into a more competitive mortgage.
There are two different ways to release equity from your home - a lifetime mortgage or a home reversion. They both involve getting cash out of your home, but one main difference is that with home reversions, you sell a share of your house in return for the money. You still get to live in your home, but you become a co-owner - it’s no longer just in your name.
Equity release is not the only way to top up your retirement pot in later life. Some other options you could consider include:
Before you make any big decisions about your later life funds, it may be worth speaking to an independent financial advisor who can help you weigh up all of your options.
Here at Money Savings Advice, we have partnered with some of the UK’s leading Equity Release brokers. They have already helped thousands of people get the best Equity Release deal and they can do the same for you.
Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.
If you would like to speak to one of these brokers who can provide you with a ‘whole market quote’ then click on the below and answer the very simple questions.
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