What’s a Lifetime Mortgage?
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What’s a Lifetime Mortgage?
If you aren’t sure what a lifetime mortgage is, you don’t want to miss this potentially life-changing article!
With more than £4.8 billion in cash paid out to UK retirees in 2021 alone through equity release, why not also get your piece of the pie?
Fortunately, this article is jam-packed with industry insight into the latest lifetime mortgage products.
In this article, we’ll help you understand:
- What’s a lifetime mortgage?
- The advantages a lifetime mortgage gives you.
- What to avoid?
- How much does it cost?
Our economic-savvy journalists strive to educate our readers about life-changing products that could benefit them throughout their retirement.
What’s a Lifetime Mortgage?
A lifetime mortgage is an equity release product available to those who’re 55 and older.
It’s a later-life mortgage that allows you to access the capital in your home as a cash lump sum, installment payments, or a combination of both.
How Does a Lifetime Mortgage Work?
A lifetime mortgage is a loan that’s secured against your home in order for you to access a portion of your property’s value as tax-free cash.
Interest is charged on a lifetime mortgage and is compounded annually.
Whilst repayments are not required, they can be made voluntarily to lower the interest or capital values of the mortgage.
With a lifetime mortgage, you’ll still retain homeownership and get to live in your house until you pass on or move into permanent care.
The loan is settled by your estate when you pass on, and your property is sold.
Why Choose a Lifetime Mortgage?
You could choose a lifetime mortgage to fund your retirement expenses, especially if you don’t have the income to afford the repayments on a traditional mortgage.
A lifetime mortgage is a more flexible product than a home reversion plan making it a popular choice amongst retirees requiring equity release.
Advantages of a Lifetime Mortgage
The advantages of a lifetime mortgage are access to tax-free cash you can spend in any way you wish, with nothing to repay in your lifetime.
Repayments are flexible; you can move house if you choose, and you can also opt for inheritance protection and a no-negative-equity guarantee.
Here’s more details.
The cash you access using a lifetime mortgage is paid out to you as a tax-free lump sum.
Spend It How You Want
You can spend your available cash how you want to.
You could take the vacation you’ve always dreamed of or pay for home renovations if you choose; it’s up to you.
Nothing to Repay
There is nothing to repay on a lifetime mortgage.
You can pay off the interest or capital amount to reduce the cost to your estate if you choose to.
If you decide to make repayments, you can choose to stop or start these at any time.
Stay In Your Home
You can stay in your own home with a lifetime mortgage until you pass on or enter permanent care.
You Can Still Move House
It’s possible to move house with a lifetime mortgage; you’ll, however, need to ascertain the criteria around moving when taking out your product.
Inheritance protection can be taken out along with a lifetime mortgage.
It allows you to “ring-fence” a portion of your property’s value to ensure that your beneficiaries will be left with something when you pass away.
No Negative Equity Guarantee
All providers that belong to the Equity Release Council1 will give you a no-negative-equity guarantee.
This means you’ll never be liable for more than your home is worth when sold, even if it’s for less than you owe.
Disadvantages of a Lifetime Mortgage
The disadvantages of a lifetime mortgage include mounting interest, reducing your inheritance, and early repayment charges.
Here’s more information.
The Interest Can Build Up Quickly
Interest on a lifetime mortgage is compounded and generally added to the loan amount annually.
If you aren’t making any repayments, this amount quickly adds up.
By accessing the equity in your property, you decrease the value you’ll be able to leave to your beneficiaries when you pass on.
If you choose to gift some money to beneficiaries, they may have to pay inheritance tax on the funds they receive.
Early Repayment Charge
Certain providers may charge you early repayment penalties if you decide to settle the mortgage early.
Means-Tested State Benefits
Your eligibility for means-tested state benefits could potentially be affected be seen as the cash you receive from a lifetime mortgage could be seen as an income.
Higher Interest Rates
Interest rates on a lifetime mortgage tend to be higher than those on a traditional mortgage.
Repaying an Existing Mortgage
If you have an existing mortgage on your property, it’ll need to be repaid with some of the equity you release using a lifetime mortgage.
This reduces the tax-free cash you’ll receive.
You may have problems moving with a lifetime mortgage if you don’t stick to your provider’s criteria regarding moving home.
Your new home can’t be a retirement property, and each provider has certain property types they will accept.
If the property you want to move to is worth less than your current home, you might need to pay the difference in value.
Types of Lifetime Mortgage
The types of lifetime mortgages available include lump-sum and drawdown options and enhanced plans.
Lump-Sum Lifetime Mortgage
A lump-sum lifetime mortgage is precisely what its name suggests; it’ll pay out a lump sum in cash against your property.
Any interest that accrues will be settled with the loan when you pass on or move into care.
Drawdown Lifetime Mortgage
A drawdown lifetime mortgage is a more flexible product than a lump sum lifetime mortgage.
It allows you to borrow smaller amounts upfront, followed by installment top-ups; you could also get paid in regular installments and forgo the lump sum amount upfront.
It enables you to borrow what you need as you go with the benefit that you only pay interest on the amount paid out.
Interest repayments on a lifetime mortgage are generally the most extensive costs associated with this type of mortgage.
Interest is compounded, which means it could quickly add up to more than the original loan amount when settling the mortgage.
Enhanced Lifetime Mortgages
An enhanced lifetime mortgage is often available to those with a shorter than average life expectancy.
It allows them to release a more considerable capital value from their homes than other lifetime mortgages.
Roll-Up Lifetime Mortgage
A roll-up lifetime mortgage provides you with a lump sum only.
You won’t make any monthly repayments on a roll-up lifetime mortgage.
The loan amount and interest owed will be settled from your home’s sale when you pass on or move into permanent care.
Flexible Lifetime Mortgage
A flexible lifetime mortgage allows you to access a lump sum and make voluntary payments at any time to reduce the amount owing.
What Are the Costs Involved in Getting a Lifetime Mortgage?
The costs involved with a lifetime mortgage include legal fees, valuation fees, application fees, product fees, as well as a completion fee.
Legal Fees & Valuation Fees
You’ll be liable for the valuation fees when your property is valued and all legal fees when you take out a lifetime mortgage.
You’ll need to pay an application fee to your chosen provider when you take out a lifetime mortgage.
Payments to the lender for the product
This is an arrangement fee you’ll need to pay to the lender for the lifetime mortgage product.
A Completion Fee
A completion fee is due by you once your lifetime mortgage application is finalised and approved.
Building insurance costs need to be paid by you to ensure your cover is in place and up-to-date.
Who Qualifies for a Lifetime Mortgage?
To qualify for a lifetime mortgage, you’ll need to meet the following criteria:
- You need to be over the age of 55.
- The remaining mortgage on your property should be minimal, or you shouldn’t have a current mortgage.
- The minimum property value usually considered for a lifetime mortgage is £70,000.
- The property to be mortgaged must be owned by you and must be based in the UK.
How Do I Take Out a Lifetime Mortgage?
To take out a lifetime mortgage, you’ll need to use a certified financial adviser who specialises in these products to assist you in approaching a provider.
Is a Lifetime Mortgage Right for You?
To determine if a lifetime mortgage is right for you, a qualified financial adviser will need to analyse your financial situation.
How Much Is a Lifetime Mortgage?
A lifetime mortgage can cost between £1500 and £3000 in fees.
How Much Can You Borrow With a Lifetime Mortgage?
The amount that you can borrow with a lifetime mortgage will depend on your age and property value.
You’ll need to consult with your financial adviser to get an accurate estimate of exactly what you could borrow.
How Long Does It Take To Get a Lifetime Mortgage?
It takes around 6 weeks from the start of the application process until completion.
What’s the Most Popular Type of Lifetime Mortgage?
The most popular type of lifetime mortgage is a flexible lifetime mortgage.
What Can You Use a Lifetime Mortgage For?
You can use the money from a lifetime mortgage for anything you desire.
Can You Pay Off a Lifetime Mortgage?
Yes, you can pay off a lifetime mortgage; bear in mind you could incur early repayment charges in some cases.
Can I Sell My House With A Lifetime Mortgage?
Yes, you can sell your house with a lifetime mortgage and either settle it or port it to a new suitable property.
We hope we’ve helped you understand lifetime mortgages in more detail.
Lifetime mortgages have evolved; it’s best to seek sound financial advice to make sure you understand precisely what your needs are and what products are best to suit them.
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