With a lifetime mortgage, you take out a loan secured on your home which does not need to be repaid until you die or go into long-term care. It frees up some of the wealth you have tied up in your home and you can still continue to live there.
How does a lifetime mortgage work?
A lifetime mortgage is when you borrow money secured against your home, provided it’s your main residence, while retaining ownership.
You might be able to ring-fence some of the value of your property as an inheritance for your family.
Also some providers might be able to offer larger sums if you have certain medical conditions, or even ‘lifestyle factors’ such as a smoking habit.
The home still belongs to you and you’re responsible for maintaining it.
Interest is charged on what you have borrowed, which can be repaid or added on to the total loan amount.
When the last borrower dies or moves into long-term care, the home is sold and the money from the sale is used to pay off the loan.
Anything left goes to your beneficiaries. If your estate can pay off the mortgage without having to sell the property they can do so.
If there’s not enough money left from the sale to repay the mortgage, your beneficiaries might have to repay any extra above the value of your home from your estate.
To guard against this, most lifetime mortgages offer a no-negative-equity guarantee (Equity Release Council standard).
With this guarantee the lender promises that you (or your beneficiaries) will never have to pay back more than the value of your home.
This is the case even if the debt has become larger than the property value.
Types of lifetime mortgages
There are two different types with different costs you can choose from.
- An interest roll-up mortgage: you get a lump sum or are paid a regular amount and get charged interest which is added to the loan. This means you don’t have to make any regular payments. The amount you borrowed, including the rolled-up interest, is repaid when your home is sold. With roll-up it is important to understand the impact of compound interest. Each year the mortgage amount rises by an agreed annual rate of interest. In the first year this interest is based only on the original amount borrowed but in subsequent years there is also interest on the previous years’ interest. This ‘compounds’ the interest meaning each year the amount of interest is higher than the previous year.
- An interest-paying mortgage: you get a lump sum and make either monthly or ad-hoc payments. This reduces, or stops, the impact of interest roll-up. Some plans also allow you to pay off some of the capital, if you so wish. The amount you borrowed is repaid when your home is sold.
Lump sum or income?
When taking out a lifetime mortgage, you can choose to borrow a lump sum at the start or an initial lower loan amount with the option of a drawdown facility.
The flexible or drawdown facility is suitable if you want to take regular or occasional small amounts, perhaps to top up your income. However, these might be subject to a minimum amount.
Rather than one big loan, it means you only pay interest on the money you actually need.
Is it right for you?
It depends on your age and personal circumstances.
There are a few factors to consider before you take out a lifetime mortgage.
- It will reduce the amount you leave as an inheritance.
- With an interest roll-up mortgage the total amount you owe can grow quickly. Eventually this might mean you owe more than the value of your home, unless your mortgage has a no-negative-equity guarantee (Equity Release Council standard). Make sure your mortgage includes such a guarantee.
- A mortgage with variable interest rates might not be suitable because the interest rate might rise significantly. But this is capped for mortgages meeting the Equity Release Council standards.
It might affect your tax position and entitlement to means-tested benefits. Lenders will expect you to keep your home in good condition within the framework of reasonable maintenance. You might need to set aside some money to do this.
If any of these might be a problem, an equity release scheme might not be suitable for you.
What does it cost?
Make sure you are aware of all the costs before going ahead.
You might have to pay:
- buildings Insurance
- legal fees and valuation fees
- an arrangement fee to the lender for the product
- a fee to an adviser for their advice and helping you set up the scheme
- a completion fee, which can be paid at the point of completion or added to your mortgage.
These costs could add up to between £1,500-£3,000.
There might be extra costs for paying off your loan early, known as ‘early repayment charges’.
You’ll have to make as sure as possible an equity release plan is right for you.
Looking for help?
Thinking about Equity Release? You can get impartial equity release and debt advice from StepChange online or by calling 0808 1686 719
Questions to ask your adviser when considering a lifetime mortgage
Always ask questions if anything isn’t clear.
Here are some important questions.
- Can you transfer the lifetime mortgage if you move home?
- What happens if you die soon after taking out the lifetime mortgage?
- How would the lifetime mortgage affect your state or local authority benefits?
- What fees are payable if you decide to repay the loan?
- Would you qualify for a grant to help you pay for home repairs or alterations?
- What conditions does the lifetime mortgage put on you when you carry on living in the home?
- What happens if you end up owing more than the home is worth? (Many providers now provide a no-negative equity guarantee.)
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