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, then a lifetime mortgage might be suitable for you. Take care though – these schemes don’t offer the best value for money, so they tend to be regarded as a last resort.
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.
With a lifetime mortgage, you borrow money against the value of your home, and then repay it when the house is sold.
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.
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 three different types of lifetime mortgages to choose from:
- A roll-up mortgage
- A fixed-repayment lifetime mortgage
- An interest-paying mortgage
According to Which?, at the current rates of interest, the debt from a roll-up mortgage will almost double in 11 years.
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, because, unlike a repayment mortgage, the amount you owe is growing all the time.
Fixed-repayment lifetime mortgage
You don’t pay any interest, but a repayment amount is agreed in advance that is higher than the loan.
When your home is sold, you have to pay the lender this higher amount.
This can work in your favour if you end up living much longer than the lender thinks you will.
But if your home has to be sold much earlier than you planned, you will get a worse deal.
You pay the interest on some or all of the loan monthly, rather than allowing it to roll up.
When your home is eventually sold, the amount you originally borrowed is repaid.
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 is constructed, your outstanding mortgage and your age.
This is why using an equity release calculator found on some websites is not really that helpful.
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?
- They can provide a guaranteed monthly income or a large lump sum.
- You get to keep and stay in your own home for as long as you need it.
- The loan is only repaid on death 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 cannot exceed the value of your property.
- When the house is eventually sold and the debt paid off, there may 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.[y[ If you are self funding your care you may be able to use the capital raised to purchase an immediate need care fee payment plan to deliver a regular income to pay for care.[/y]
- They might affect your entitlement to benefits, or support from your local authority, as 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 itself.
- 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 might need to pay arrangement, valuation and legal fees.
- If you sell up or die soon after taking out a plan, your estate could incur a loss.
- You might not be able to transfer all of the debt if you move to a smaller property.
- You will be required to have buildings insurance.
- Lenders will expect you to keep your home in good condition, so you will need to set aside some money for repairs and maintenance.
Remember, 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
“My financial adviser told me I’d pretty much exhausted all the other options and that a lifetime mortgage was going to be the only way I could raise the money to pay for my care. It’s lucky that I’d already paid off the mortgage but I do worry that if house prices don’t go up much more now, the children could end up with nothing.” – Peter
So how do lifetime mortgage schemes compare to 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, so they tend to be regarded as a last resort for homeowners.
Talk to family members before making any decision. It may 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 that 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 do decide to go ahead with a lifetime mortgage, it’s essential 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.
Contact Step Change a charity that can provide free advice on money matters and equity releaseopens in new window.
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