Everything you need to know about lifetime mortgages
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We receive lots of enquiries asking for more information about lifetime mortgages. The requests vary from wanting to know what they are, how they differ from other types of equity release loans and whether they are the right option at this particular stage in your life. As a result of these enquiries we have produced this detailed guide that will give you all the information you need about lifetime mortgages and help you determine if this is a product that suits your requirements. Once you’ve read through all the details here, it’s important you get in touch so we can arrange for a lifetime mortgage expert to speak with you directly. In this article we will look at:
- What is a lifetime mortgage?
- How does a lifetime mortgage work?
- Who can have a lifetime mortgage?
- What are the different types of lifetime mortgages available?
- How much can I borrow for a lifetime mortgage?
- Frequently asked questions
What is a lifetime mortgage?
Lifetime mortgages are a form of equity release loan that allows you to unlock a proportion of money held within the value of your property. Your home is used as security for the loan, which does not need to be repaid until you either die or go into a long-term care facility. Lifetime mortgages are available to you if you are aged 55 or older. The money raised can be used for anything you wish, typically; holidays, medical care, family gifts or home improvements.
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What is an equity release loan?
A house is classified as a ‘fixed asset’ or ‘illiquid asset’ which means it is not easily transferred into cash. Many people who approach retirement can find themselves asset rich but cash poor. For example, an elderly person’s house could be free of any debt and valued at £300,000 but they could have little or no cash in their bank account and only a small retirement pension. What do these people do if they need to raise a large amount of money in a short space of time? An equity release loan is a facility that allows someone to release money from within his or her property without the need to sell it and move elsewhere. There are usually two ways you can take money from your property via equity release:
- Lump sum
- Income drawdown
Most plans offered by lenders will provide you with a lump sum straight away into your account. However, some lenders will offer the option to drawdown this sum as and when you need it rather than taking it all immediately if this better suits your requirements. An equity release loan is typically repaid, including interest, when the property is sold at some point in the future rather than via regular repayments as with standard mortgages. Traditionally, there are two types of equity release loan:
- Lifetime mortgage
- Home reversion plan
There is quite a big difference between a lifetime mortgage and a home reversion plan. A lifetime mortgage, as with all other types of loan, allows you to retain 100% ownership of your property. With a home reversion plan a provider buys a percentage of your house in return for which you receive a tax-free lump sum and the right to stay in your home, rent free, for as long as you live or move into long-term care. You do not have any repayments or interest to pay. A home reversion plan provider will not pay market value for the share of your property it is purchasing, as there is no known time limit for how long you will remain in the property. The reduction, therefore, covers this risk. So, essentially, home reversion plans are not loans. You are giving up total ownership of your property and any future increase in value of the percentage of your home covered by the home reversion plan. At the end of the plan your property will be sold and the proceeds split up as per the new ownership shares. Home reversion plans are not very common these days as the benefits of lifetime mortgages far outweigh any benefits these products provide. If you’d like to speak with an equity release specialist make an enquiry and we will arrange for someone to contact you directly.
How does a lifetime mortgage work?
A lifetime mortgage allows you to borrow money against the value of your main residence whilst still retaining full ownership of the property. The lender will use your home as security for the mortgage. The money you have borrowed can be released to you in one of two ways:
- One lump sum payment
- Draw-down facility
A draw-down facility will allow you to take portions of the money as and when you require it. This is particularly useful if you want to use the money from the lifetime mortgage in order to top up your retirement income. Whereas traditional mortgages have a fixed term for the debt to be repaid, what you borrow from a lifetime mortgage is only repaid either when you die or when you enter a long-term care home (hence the name). At this point your property will be sold and the proceeds will be used to repay the debt. In the event of your death, once the house is sold and money repaid to the lender, any remaining equity will be returned to your estate and distributed to beneficiaries in accordance with your will. If sufficient monies exist to repay the debt without selling the property this is also an option available to the trustees of the will.
How is interest paid on a lifetime mortgage?
There is no requirement for regular payments of either capital or interest to be made for a lifetime mortgage unless on a voluntary basis. All interest accrued is added to the outstanding balance and repaid when the property is eventually sold. Unlike repayment mortgages, where the debt will gradually decrease throughout the term, with a lifetime mortgage your debt increases as the interest rolls up and, thus, so does the interest payments. If you use a draw-down facility you will only accrue interest on the money you have taken out rather than the whole amount. In order to avoid increasing the overall debt some lenders offer a repayment option to service the interest during the life of the mortgage. Fixed rates of interest or rate caps are quite common for lifetime mortgages available from lenders who are members of the Equity Release Council. For further details on the interest rates available for lifetime mortgages, make an enquiry and we can arrange for a specialist to get in touch.
Who can have a lifetime mortgage?
Lifetime mortgages are available to anyone over the age of 55 who owns their own property in the UK and is resident within the UK for at least six months of the year. Security for the mortgage will only be taken against your main residence. Most lenders have no maximum age at the end of the term because the mortgage remains open until either the applicant dies (or in the case of a joint lifetime mortgage, the last living applicant) or they go into long-term care. However, some lenders do have a maximum age of either 80 or 85 at the outset and may wish to verify that the applicant is capable of making a decision to borrow money at this stage of their life.
What are the different types of lifetime mortgages available?
Lump sum interest roll-up
This is the most traditional type of lifetime mortgage where you take all the money as a tax-free lump sum at the outset. There’s absolutely no requirement to make any repayments for the rest of your life. All of the interest owed is accrued on top of the initial amount borrowed and the full amount is only repaid either when you die or if you move into a long-term care home.
Sometimes referred to as a flexible lifetime mortgage, with this option you’re able to take a small amount at the outset and then take further money from the original capital borrowed as and when required. This option is quite popular amongst those who are looking to use this facility as a way of adding to their retirement income. You only accrue interest on the amounts you have withdrawn, which should make this type of lifetime mortgage much less costly than taking all the money at the outset.
Rather than allow interest to simply build up on top of the original amount borrowed, this type of lifetime mortgage allows for some, or all, of the interest payments to be serviced during the lifetime of the applicant to ensure the overall debt remains at the same level. It’s possible some lenders will want to conduct an affordability assessment to ascertain if an applicant receives sufficient regular income in order to cover the payments for this option.
Enhanced lifetime mortgages
By analysing the health and lifestyle of an applicant, a few select lenders are able to offer enhanced terms where poor health can clearly be evidenced. Enhanced lifetime mortgages work along similar lines to enhanced annuities to assess the life expectancy of an applicant, which may result in the availability of higher loan-to-value thresholds and reduced interest rates.
How much can I borrow for a lifetime mortgage?
For traditional mortgages the amount you can borrow is governed by stringent affordability criteria, which can vary from lender to lender. With lifetime mortgages affordability isn’t really a factor at all because there are no regular payments required in order to repay the debt and your property is used as security. Your age, your health and the value of your property are the main factors that will impact how much you can borrow for a lifetime mortgage. The older, and less healthy, you are the more you are able to borrow. An 80 year old applicant, long since retired, will be able to borrow a lot more than a healthy 55 year old who may still have many years of work left in them. All lenders will carry out a comprehensive medical health assessment and review of an up to date doctor’s report, which will form the basis for how high the loan-to-value will be for a particular applicant. Your property will also require an appropriate valuation before the lender approves the mortgage. Any home must be deemed sellable and adequate security for the loan. As with affordability criteria for traditional mortgages, the eligibility criteria for lifetime mortgages will differ from lender to lender. Depending upon the factors outlined above, most lenders will offer a loan to value of 50%, some will offer 55% and a few will go as high as 60%. If you’d like to find out more about how much you can borrow for a lifetime mortgage, get in touch and we can arrange for an expert to contact you directly.
Frequently asked questions
Is it possible to ever owe more than my property is worth with a lifetime mortgage?
Negative equity is an obvious concern for many who are considering a lifetime mortgage. It stands to reason that if you live long enough the accrued income could roll up beyond the market value of your property. It’s vital that the lender you choose is a fully fledged member of the Equity Release Council, which means they must adhere to a strict code of conduct designed to protect the interests of consumers at all times. Within this code of conduct is an agreement that the lifetime mortgages they provide have a ‘no negative equity guarantee’ included. This means that you, or your beneficiaries, will never have to pay back any more than the value of your property.
What are the costs involved with a lifetime mortgage?
The costs and fees associated with a lifetime mortgage will obviously vary from lender to lender. Typically, these fees could amount to between £1,500 – £3,000 and would include:
- Legal fees
- Valuation fees
- Buildings insurance
- Arrangement fees
- Advice / broker fees
- Completion fees
Will my poor credit record impact upon my chances of getting a lifetime mortgage?
A poor credit record would normally have an impact on an application for a traditional mortgage. However, with a lifetime mortgage it really shouldn’t have any real affect as there is no requirement for regular repayments and your house is used as security. An applicant is still required to declare this information and it may, potentially, impact the interest rate offered by a lender who may request that any outstanding debts are cleared before approval for a lifetime mortgage is granted.
Can I move house with a lifetime mortgage?
Yes you can. Another advantage of choosing a lender who is a member of the Equity Release Council is that all equity release loans must be portable. However, any property purchased must be deemed suitable security for the lifetime mortgage and a sellable asset by the lender
Will a lifetime mortgage lump sum affect any means-tested benefits?
Yes, possibly, as you will be increasing the amount you hold as cash within your bank account. It is important you consider how your benefits could be affected before proceeding with a lifetime mortgage application.
Would a retirement interest only (RIO) mortgage be a better alternative than a lifetime mortgage?
This really depends upon your own personal circumstances. A retirement interest only (RIO) mortgage is quite similar to a traditional interest only mortgage but with no definite end date. As with a lifetime mortgage a RIO mortgage is redeemed when you die, go into long-term care or sell your property. The key difference between a RIO mortgage and a lifetime mortgage is the requirement for regular interest payments; therefore, you would need to pass a lender’s affordability assessment. If you have a regular stable income in retirement such as a pension then this may be a consideration. To understand more about which mortgage may be right for you, make an enquiry and we can arrange for an advisor we work with to speak with you directly.
Speak to a lifetime mortgage expert
If you have questions and want to speak to an expert for the right advice, call Online Mortgage Advisor today on 0800 304 7880 or make an enquiry here. Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances. – We don’t charge a fee and there’s absolutely no obligation or marks on your credit rating.