Last reviewed on 19th April 2021
A lifetime mortgage can be ideal for releasing equity in your home. With an increase in homeowners choosing not to move home, lifetime mortgages are becoming an attractive prospect. Nonetheless, it is a financial commitment and requires careful consideration before deciding on what’s best for you.
What is a lifetime mortgage?
A lifetime mortgage is a form of equity release, which allows you to borrow a tax-free lump sum that is secured against your home. You’d still retain ownership of your home and it wouldn’t affect your living arrangements.
The main difference between a lifetime mortgage and a remortgage to release equity is that the loan doesn’t need to be repaid immediately. Lifetime mortgages are typically repaid on death or if you go into care.
Learn more: Should I remortgage to release equity?
Types of lifetime mortgages
As with each mortgage type, there are options that you can choose to suit your own lifestyle.
The three main types of lifetime mortgages are:
- Drawdown mortgages
- Lump-sum mortgages
- Flexible mortgages
What is a drawdown mortgage?
A drawdown mortgage allows you to withdraw money from your home when required. You’ll be able to choose an initial amount and also make further withdrawals from a reserve account when you need to. Think of this as a drawdown facility.
One of the main advantages is that the money held in your reserve account won’t be charged interest. Interest is only charged once you withdraw funds from your reserve account. This is a great way to keep interest charges to a minimum whilst having the security of knowing you can access your funds at any time.
Drawdown mortgages remain a popular choice for lifetime equity release. They can be ideal if you’re not in need of a huge amount of capital and offers flexibility which leaves you in control of your money.
Lump-sum mortgages are very simple. You’d receive a large lump sum towards the start of your equity release. The interest is then ‘rolled up’ over the term of the loan. You won’t have to make payments until death or if you moved into full-time care.
It’s important to note that if you take a large lump sum immediately, interest can rise quite significantly. This is because interest is compounded each year until the end of your mortgage term. Most lenders do offer a negative equity guarantee, that guarantees your property will repay the mortgage, even if it falls in value.
This type of lifetime product allows you to make voluntary payments towards the mortgage balance. Some lifetime providers offer monthly repayment options, where you’ll be able to repay a fixed amount each month.
This type of mortgage can also be referred to as a flexible lifetime mortgage. This is because if you don’t want to repay anything each month, you won’t have to.
Factors to consider before committing to a lifetime mortgage
It’s always important to consider both the advantages and disadvantages of any mortgage you take. While equity release allows you to free up some wealth in your home, there’s still a lot to consider beforehand.
- Your living arrangements do not change
- You still own your home
- Release funds that are otherwise tied up
- The funds from the loan can be used for anything
- Lenders can be flexible in how your loan is repaid
- Option to safeguard a percentage of the property value as an inheritance
- Some lenders offer negative-equity guarantees – Which guarantees that the sale of the home will cover the repayment of the loan in full
- Although you can safeguard some inheritance, the overall inheritance from the property will decrease
- Equity release could expose you to higher tax thresholds
- If you move home, your lifetime mortgage will need to move with you
- Moving home may become difficult, as your new home will need to meet your lender’s criteria
- Ending a lifetime mortgage early can often result in heavy early repayment charges
- You pay interest on the loan and also on the accruing interest amount
- You can’t get a lifetime mortgage if you have an existing mortgage on your home. The only way to do this is by using a lifetime mortgage to repay your outstanding mortgage balance in full.
Will I qualify for a lifetime mortgage?
Lenders vary in what they’ll offer each individual and also how they carry out their assessments. For instance, some lenders will only consider applicants aged 55 or over. Other lenders may offer flexibility when assessing the age of an applicant. Health conditions and lifestyle choices such as whether or not you smoke can also play a part in how your application is assessed.
If you own an investment property, you may qualify for equity release on a buy to let. If so, the number of lenders you can approach is likely to be limited. This is why consulting an advisor is so important.
Your home itself can be a factor when lenders make their assessments. For instance, your property type, condition and property value will be assessed. This is so lenders can be confident that they’ll be able to recover their funds once needed.
In all honesty, each applicant’s situation will vary. You can get an accurate idea by speaking to a specialist. Not only will an advisor assess your circumstances, but can also guide you on whether or not a lifetime mortgage is right for you.