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 is your main residence, while retaining ownership.
You can choose to ring-fence some of the value of your property as an inheritance for your family. Additionally, some providers may be able to offer larger sums to those with 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 you die or move 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 is not enough money left from the sale, your beneficiaries would 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 at the end of your mortgage term when your home is sold.
- 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 capital, if you so wish. The amount you borrowed is repaid when your home is sold at the end of your mortgage term.
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, rather than one big loan, as it means you only pay interest on the money you actually need.
Is it right for you?
It depends on your age and circumstances. Here are some factors to consider.
- With an interest roll-up mortgage the total amount you owe can grow quickly. Eventually this might mean that 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 may not be suitable because the interest rate may rise significantly. However, one of the Equity Release Council standards states that if the interest rate is variable there is an upper-limit ‘cap’.
- It may affect what you leave as an inheritance.
- It may 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.
Lenders will expect you to keep your home in good condition. You may need to set aside some money to do this. If this could be a problem, an equity release scheme may not be suitable for you.
What does it cost?
Make sure you are aware of all the costs before going ahead. You may have to pay:
- an arrangement fee to the lender for the product
- legal fees and valuation fees
- a completion fee, which can be paid at the point of completion or added to your mortgage
- buildings insurance
- a fee to an adviser for their advice and helping you set up the scheme
These costs may add up to between £1,500-£3,000. There may be extra costs for paying off your loan early, known as ‘early repayment charges’. So you will have to make as sure as possible that an equity release plan is right for you.
Questions to ask your adviser when considering a lifetime mortgage
Always ask questions if anything isn’t clear. Here are some important questions.
- How would the scheme affect your state or local authority benefits?
- What happens if you end up owing more than the home is worth? (Many providers now provide a no-negative equity guarantee.)
- What happens if you die soon after taking out the scheme?
- Can you transfer the scheme if you move home?
- What conditions does the scheme put on you when you carry on living in the home?
- Would you qualify for a grant to help you pay for home repairs or alterations?
- What fees are payable if you decide to repay the loan, say after three years?
You can find FCA registered financial advisers who specialise in retirement planning in our Retirement adviser directory.
Find an adviser with an equity release qualification on the Equity Release Council member directory.