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Lifetime Mortgages Explained
Lifetime mortgages allow you to receive tax-free cash from your home without moving. It’s a type of loan secured against your home. It can also be described as an equity release. Over the last few years, this type of mortgage has become popular for raising capital.
If you own your house, your home is an asset. Normally, you can’t profit from this asset unless you sell your home. With a lifetime mortgage, the bank lends you some of your house’s worth. You can then use this equity release in whatever way you wish.
While it is a good way to free up some cash, they do come with their risks.
How do lifetime mortgages work?
Lifetime mortgages work the same as regular mortgages with some key differences. Like regular mortgages, you borrow money against the value of your home and also pay interest for the amount borrowed. However, you’re not obliged to make monthly repayments (although, you can if you like).
Instead, you can make occasional payments to reduce the size of the loan or pay off some or all of the interest. These payments are completely optional, and you can even decide not to pay anything at all within your lifetime.
If you choose not to pay off the mortgage, the loan will have to be repaid in full (plus interest) when the last borrower dies or moves into a care home. At this point, the house will be empty, so can be sold to pay off the lifetime mortgage.
Am I eligible for a lifetime mortgage?
To qualify for a lifetime mortgage, you normally need to be at least 55 years old. This applies to you and any joint applicants. However, some lenders may offer a lifetime mortgage to people who are under the age of 55.
The main requirement of this equity release-type of mortgage that applies to all lenders is home ownership. If you don’t actually own the home, you don’t own the equity. This property needs to be your primary place of residence and be in the UK. The applicant for the mortgage also needs to be a UK citizen.
Lastly, the value of your home normally needs to be above £70,000.
How much can I borrow with a lifetime mortgage?
The amount that you are able to borrow from a lender with a mortgage depends on your age and the total value of your house. Obviously, the higher the house value, the bigger the potential equity release.
Normally, lenders of lump sum mortgages agree to pay you somewhere between 20% and 60% of your property value. The amount you are offered normally increases the older you get.
What are the interest rates like for a lifetime mortgage?
Interest rates differ from lender to lender, and are also influenced by the overall value of your home as well as the size of the mortgage you take out.
You can get an estimate of how much interest you’d have to pay by using an online mortgage calculator.
How much will a lifetime mortgage cost overall?
In 2023, you can expect to pay somewhere between 6.05% and 7% in interest for a lifetime mortgage. Of course, this rate depends entirely on your loan-to-value ratio and how much equity you release. The rate you’re offered will be fixed for the duration of the loan.
This will depend on the amount you borrow through a mortgage as well as your agreed-upon interest rate.
Interest then accrues and is later rolled up and added to the loan amount you owe the lender. If you don’t pay off any of your mortgage early on, this build-up of interest could lower the value of your house quite significantly.
Again, the total amount you’d have to pay for a mortgage could be estimated using an online mortgage calculator.
The Different Types of Lifetime Mortgages Available
Lump sum lifetime mortgage
A lump sum lifetime mortgage is a single loan amount that you receive when you take out the mortgage. After you’ve received this lump sum, you don’t receive any more equity. This is a good option if you’ve got one thing you need to pay for immediately, such as a new car, an operation, etc.
Interest is charged on the full amount borrowed, which you can fix for life. You can choose to pay off this equity release plus interest in regular stages or the entirety of the loan after you move out of your home.
Drawdown lifetime mortgage
Instead of receiving all your equity releases in one lump sum, a drawdown mortgage can be used to stretch out the finance you receive over time. Normally, the initial sum is bigger than all of the rest of the equity payments.
A drawdown mortgage is a good idea for keeping your interest levels low. You are only charged interest on the amount of equity you have received. Whereas, with a lump sum lifetime mortgage, you’ll have to pay a significant amount in interest from the get-go.
With this type of mortgage, you can also choose to make regular payments or pay back the entire loan in full when you leave your home.
How Does Compound Interest Work On Lifetime Mortgages?
Compound interest is either added to your lifetime mortgage on a monthly or annual basis. This interest is rolled into the total amount of your mortgage, regardless of whether it’s added monthly or annually.
For example, let’s say you’ve received an equity release of £80,000, and you’ve decided to receive this money as a lump sum. If your fixed interest rate was 7%, you’d be charged £5,600 for the first year. This would be rolled onto your total amount due.
So, the total amount you owe will be £85,600 at the start of the second year. At the start of the second year, 7% of £85,600 will be calculated (which is £5,992) and added to your total, and so on.
This is where mortgages can become risky, as the interest is constantly increasing and being rolled onto your total.
The No Negative Equity Guarantee
While compound interest rates result in you having to pay quite a lot of cash back in interest, the no negative equity guarantee ensures you won’t have to pay back more than your house is worth.
This is a standard set by the Equity Release Council, which is a voluntary body aimed at ensuring that equity release practices are conducted fairly.
However, not all lenders offer no negative equity – so, be sure your lender does before agreeing to the mortgage.
How to Take Out A Lifetime Mortgage: A Step-by-Step Guide
To give you a general idea of how the equity release process works, here’s a breakdown of how to take out a lifetime mortgage:
- Get an estimate using a lifetime mortgage calculator.
- Speak with a financial advisor to determine whether a lifetime mortgage is right for you. Through this, you can receive personalised advice and better understand what options are available to you.
- Compare lenders. Your financial advisor will be able to point you in the right direction of reputable and trustworthy life mortgage lenders. Compare interest rates, terms, fees, and so on.
- Once you have settled on a lender, reach out to them. They’ll then check to see if you and your property meet their criteria.
- Before you move on to the completion stage, you need to receive independent legal advice from a solicitor or legal advisor. This legal advisor will be able to break down the terms of your mortgage to see if everything checks out.
- If the legal advisor approves everything and you’re happy to move forward, submit an application to the lender. The lender will likely send a surveyor around to do an appraisal of your house.
- Once approved, you’ll receive documentation explaining the mortgage more in-depth. Your chosen solicitor will deal with the legal process (help with the signing process). Your solicitor will also arrange for the safe depositing of the mortgage into your bank account.
- If you have any charges against your home, you’ll need to clear them first using the equity release. Once you’re free of other charges, you can spend your equity however you wish.
The Pros and Cons
As we’ve made clear throughout this article, there are clear pros and cons of taking out a lifetime mortgage. To reiterate these, here are the main positives and negatives of releasing equity:
Pros
- You can unlock tax-free cash.
- You can use a lifetime mortgage to pay off whatever you want – including an existing mortgage on another property.
- If the loan is approved by the Equity Release Council, then you won’t receive any negative equity.
- You don’t have to sell your home – you can maintain full ownership of the property throughout your life.
- Payments are flexible. You can pay regularly, irregularly, or never at all (until the end of the loan).
Cons
- It’s a loan secured against your property that you have to pay interest on.
- Compound interest can increase dramatically, and even cause you to lose all the equity in your home.
- Equity release reduces the value of your property.
- Depending on your loan, you may be subject to an early repayment charge.
FAQs
Can you sell your house when you have a lifetime mortgage?
Yes, many people end up paying off their lifetime mortgage by selling their property. However, your property won’t have as much value, given the lifetime mortgage. If you’re able to pay off the mortgage early, you could make back the total value of your home.
Sources:
https://www.legalandgeneral.com/retirement/lifetime-mortgages/
https://www.keyadvice.co.uk/equity-release/lifetime-mortgages