Using a lifetime mortgage to pay for your long-term care

 

If you’re over 60, a homeowner and you need to finance your long-term care, a lifetime mortgage might be suitable for you. Take care though – these schemes don’t offer the best value for money. However if you can’t or don’t want to downsize, it's one option you could consider. 

What is a lifetime mortgage?

It’s a type of equity release scheme that lets you use some of the money that’s tied up in your home.

You could use this to pay for long-term care, but only if you’re looking to stay in your home.

Lifetime mortgages are one of the two main types of equity release. The other is a home reversion plan.

How do lifetime mortgages work?

Like any mortgage, a lifetime mortgage is a loan secured against your home. You then repay it when the house is sold.

The loan can either be taken as a lump sum or in amounts drawn down over a set period or for life.

Interest is charged on the loan – which you either pay, or more typically, allow to roll up.

If you draw down the loan, you only pay interest on the amounts you take from the time you take them.

When you die or move out, your home is sold and the money is used to pay off the loan. Anything that’s left over goes to your beneficiaries.

If there isn’t enough money left from the sale to pay off the loan, your beneficiaries would need to make up any shortfall from your estate.

To guard against this, most providers offer a no-negative-equity guarantee.

This means that you, or your beneficiaries, won’t have to pay back more than the value of your home, even if the debt has become larger than this.

There are two different types of lifetime mortgages to choose from:

  • a roll-up lifetime mortgage
  • an interest-payment lifetime mortgage.

Roll-up lifetime mortgage

With a roll-up mortgage, interest is added to the loan.

You don’t make any regular payments. But the amount you originally borrowed, plus the rolled-up interest, needs to be repaid when your home is eventually sold.

The interest you owe can grow quickly. This is because, unlike a repayment mortgage, the amount you owe is growing all the time.

Interest-payment lifetime mortgage

You pay the interest on some or all the loan monthly, rather than allowing it to roll up. With some lifetime mortgages you can also make payments of capital.

When your home is eventually sold, the amount you originally borrowed is repaid (minus any capital repayments if you've made them).

Interest rates can either be fixed or variable.

Take special care with variable interest rates – you’ll never know exactly how much you’ll be paying.

How much equity could you release?

This will depend on a number of factors, such as:

  • how much your property is worth
  • the type of property
  • how it’s constructed
  • your outstanding mortgage and your age.

Some websites have equity release calculators.

For example, there’s one on the StepChange website

But be aware how helpful they are can be limited – as they don’t take into account the factors listed above.  

Important safeguards

The Financial Conduct Authority (FCA), the UK’s financial services regulator, regulates lifetime mortgages.

This means that firms advising on or selling these products have to meet certain standards and provide clear complaints and compensation procedures.

What are the pros and cons of lifetime mortgages?

Pros
  • They can provide a large lump sum, or some firms offer a more flexible option where you take a smaller amount at the start, then draw down more if you need to. (It’s important to get independent financial advice before you decide, to find out if it’s the best option for your situation.)

  • You get to keep and stay in your own home for as long as you need it.

  • The loan is only repaid on death, moving into care or the sale of your property.

  • There’s the potential to benefit from any future increases in the value of your property.

  • Fixed rates prevent interest spiralling out of control.

  • Many schemes guarantee the total debt can’t exceed the value of your property.

  • When the house is eventually sold and the debt paid off, there might be money left over to provide some kind of inheritance.

  • The equity released on your main property is tax-free.

  • Equity release schemes can help to reduce your Inheritance Tax liability. It's important to get advice if this is an important factor for you. 

  • If you’re self-funding your care, you might be able to use the capital raised to buy an immediate need care fee payment plan to deliver a regular income to pay for care. 

  • Find out more in our guide on Immediate needs annuity.

Cons
  • They might affect your entitlement to benefits, or support from your local council. This is because any money you raise through equity release is likely to affect the assessment of your income and capital.

  • The inheritance you pass on to your beneficiaries will be substantially reduced and won’t include your home. Beneficiaries will typically have a chance to pay off the debt and keep the home if they want. 

  • They can be inflexible if your circumstances change. You’ll usually need the provider’s permission for someone else, such as a relative, carer or new partner, to move in.

  • You're likely need to pay arrangement, valuation and legal fees.

  • You might not be able to move to a smaller property or transfer the debt to it.

  • You’ll need to have buildings insurance.
  • Lenders will expect you to keep your home in good condition. So you’ll need to set aside some money for repairs and maintenance.

  • You’ll still be responsible for paying your utility bills and Council Tax. So you’ll need to make sure you can afford these.

Lifetime mortgages versus other ways of funding care

So how do lifetime mortgage schemes compare with other means of funding your long-term care, such as downsizing, insurance policies and investment products?

Equity release schemes don’t offer the best value for money. However if you can’t or don’t want to downsize, it's one option you could consider.

Talk to family members before making any decision. It might be that they can help you or come up with alternatives.

Consider what grants or subsidised loans might be available if you’re raising capital to improve or modify your home.

Downsizing is a more cost-effective option. It can free up the money you need and allow you to maintain your financial independence, and perhaps allow you to live in a property more suited to your needs.

It can be both time-consuming and stressful though, and you’ll have to move from your current home.

Next steps – get independent advice

If you decide to go ahead with a lifetime mortgage, it’s important to speak to an independent financial adviser. Preferably one with the specialist CF8 qualification on advising on the funding of long-term care.

More information on lifetime mortgages

Find out more about lifetime mortgages on the Which? Website

For free advice on money matters and equity release, go to the StepChange website

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Whatever your circumstances or plans, move forward with MoneyHelper.

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