What is a lifetime mortgage?
31 August 2022
How do lifetime mortgages work?
Lifetime mortgages are a form of equity release. Lifetime mortgages enable you to borrow money secured against your property, as long as this property is your main residence, whilst retaining ownership of the property.
When the last borrower either moves into long-term care or dies, the home will be sold and the money generated from the sale will be used to pay off the loan. Any amount left over will go to the beneficiaries. Similarly, if your estate is able to pay off the mortgage without selling the property, this would be allowed.
In certain circumstances, there might not be enough money left from the sale of the property to repay the mortgage, which could leave your beneficiaries having to repay any extra above the value of the home. However, to help you guard against this, we only work with Equity Release Council lenders who offer the no negative equity guarantee. This guarantee ensures that you or your beneficiaries will never have to pay back more than the value of your home to pay back the mortgage, even in situations where the debt has grown to larger than the property value.
Depending on the lender and the mortgage product, you might be able to ring-fence a part of the value of the property as an inheritance for your beneficiaries.
Different types of lifetime mortgages
There are two primary types of lifetime mortgages. These are:
- Interest roll-up mortgage
- Interest-paying mortgage
Due to the differences in costs, it is important to understand the difference in these lifetime mortgages before applying.
Interest roll-up mortgage
With an interest roll-up mortgage, you will receive either a lump sum or receive a regular amount. You will be charged interest, which is added to the total value of the loan. With an interest rolled-up mortgage, you do not make regular repayments, instead the total amount borrowed plus the rolled-up interest is repaid upon the sale of your home.
The total value of the debt will rise by an agreed upon annual rate of interest every year for lifetime fixed products, so it is important to factor in the compound interest that will accumulate year-on-year.
Interest-paying mortgage
With an interest-paying mortgage, you will receive an upfront lump sum, and then make either monthly or ad hoc payments to reduce or stop the interest rolling up. Depending on the mortgage product, you might have the option to pay off some of the capital as well. The total amount borrowed plus any applicable interest will be repaid when your home is sold.
Is a lifetime mortgage right for you?
You will need to be at least 55 years of age to apply for a lifetime mortgage, and you will need to either own or be buying your own home and have little to no mortgage left to pay. Deciding whether a lifetime mortgage is right for you will depend upon your personal circumstances, however there are a few factors to consider:
- Taking out a lifetime mortgage will reduce the amount you leave to your beneficiaries as an inheritance
- Due to compound interest, the total amount owed with an interest roll-up mortgage can grow quickly, especially as the loan ages
- Lenders often have requirements that you maintain your property up to a reasonable standard
- A lifetime mortgage might affect your entitlement to certain means-tested benefits and might impact your tax position
- Depending on the lender and the mortgage, there might be early repayment charges should you pay off your loan early
Benefits of a lifetime mortgage
- Tax-free cash
- Flexible repayments, including option for no repayments
- Frees up some of the wealth in your property
- You can continue living in your home, or decide to move house
- No negative equity guarantee with an Equity Release Council lender
Potential negatives to consider with a lifetime mortgage
- Compound interest can lead to a large accumulation of interest
- Reduced inheritance to pass on to your beneficiaries
- Early repayment charges if you repay early
- Can affect your eligibility for means-tested benefits
- Typically lifetime mortgage interest rates are higher than rates charged for traditional mortgage products
Costs to consider when applying for a lifetime mortgage
When taking out a lifetime mortgage, there are certain costs that you might be liable for. These include but are not necessarily limited to:
- Legal fees
- Valuation fees for your property
- Buildings Insurance
- Arrangement fees
- Adviser fees
- Completion fees
Important questions to ask a lifetime mortgage adviser
Committing to a lifetime mortgage is a big decision; it is vital that you fully understand the costs and commitments that you are signing yourself up for. To help you understand the ins and outs of a lifetime mortgage, make sure to ask your mortgage adviser the following questions:
- What happens if you were to die shortly after taking out the lifetime mortgage?
- Can the lifetime mortgage be transferred to a different property?
- Will the lifetime mortgage affect your eligibility for certain means-tested benefits?
- What are the fees payable should the loan be repaid early?
- Are there any conditions placed upon the homeowner?
- Is there a no negative equity guarantee, and is the lender part of the Equity Release Council?
If you are considering a lifetime mortgage and would like to speak to a specialist mortgage adviser, our team would love to help. Use the contact form to book an appointment with one of our team to start your lifetime mortgage journey.