Last Updated on 12th July 2020
A lifetime mortgage can be great for releasing equity in your home. With an increase in homeowners choosing to stay put, lifetime mortgages are becoming an attractive prospect. Nonetheless, it is a commitment and needs careful consideration before deciding on what’s best for you.
This guide will explain everything you need to know about lifetime mortgages. You can also make an enquiry with an advisor at any time.
What is a lifetime mortgage?
A lifetime mortgage is a form of equity release, which allows you to borrow tax-free cash against your home. The loan is usually long-term and is secured on your own 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 paid on death or if you go into care. Interest is rolled up and repaid on the sale of your property.
Learn more: Should I remortgage to release equity?
Types of lifetime mortgages
As with every mortgage, there are options that you may be able to choose to suit your own lifestyle. With lifetime mortgages, there are three main types of how the loan can be repaid.
The three main types are:
A drawdown 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.
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 borrowers. They can be great if you’re not in need of a huge amount of instant capital and offers flexibility which leaves you with control of your money.
Lump-sum and rolled-up mortgages
Lump-sum lifetime mortgages are very simple. You’d receive a large lump-sum towards the start of your mortgage. 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 to a care home. Lump-sum mortgages can also sometimes be referred to as ‘rolled-up lifetime mortgages’.
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’, which guarantees that your property will repay the mortgage, even if it falls in value.
Interest repayment and flexible mortgages
This type of lifetime product will allow 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.
Pros and cons of a lifetime mortgage
It’s always important to consider both the advantages and disadvantages of any mortgage you take. A lifetime mortgage is considered a niche mortgage type, so our advisors have compiled an easy to follow list below.
- 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 – This 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 redemption penalties
- You pay interest on the loan and interest 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 for 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 person’s situation will vary. You can get an accurate idea by speaking to a specialist. Not only will we assess your circumstances, but we’ll also guide you on whether or not a lifetime mortgage is right for you. Our advisors can also search for the best deals available, ensuring your financial affairs are watertight.