A lifetime mortgage is considerably different to standard mortgages, with one difference being that there is no set period of time to pay off your mortgage loan and also a lifetime mortgage is only available to homeowners over 55 years old. Essentially, a lifetime mortgage enables people coming up to retirement age and older to unlock tax-free equity in their home without needing to sell it.
How exactly does a lifetime mortgage work?
A lifetime mortgage is an arrangement between a provider and a homeowner where a loan is secured against their property. The loan is not paid back until after the homeowner dies or goes into long-term care (unless they choose to pay their monthly interest to keep the costs down) but they are able to continue living in the property. When the homeowner dies, the house is then sold and the loan and interest is paid back from the proceeds of the sale.
Is a Lifetime Mortgage right for you?
There are a lot of considerations to take into account before deciding whether a lifetime mortgage is the right choice. The main factor to be aware of is that interest can increase rapidly. If you are planning on leaving inheritance to your family, you need to decide whether a lifetime mortgage will negatively impact your will plans.
Taking out a lifetime mortgage will allow you to take equity out of your home to spend on whatever you choose and you can enjoy it whilst you are still alive, taking holidays or gifting your loved ones and helping them get started with their own home, for example.
Given that the average life expectancy for women in the UK is 82.9 years and 79.2 for men, this can give you an idea of the amount of interest that you could end up paying on a lifetime mortgage. If you take it out aged 55 and live to be 80 then your interest will have been increasing over those 25 years, meaning your family could inherit considerably less money than if the house was sold without a lifetime mortgage against it. It is also worth noting that inheritance tax is 40%, so when you are doing your calculation to try and work out the best option in terms of inheritance value, don’t forget to factor that in.
What is the difference between a Lifetime Mortgage and a Residential Mortgage?
Whilst a residential mortgage is where a mortgage provider lends you the money to buy a property, with a lifetime mortgage you already have the property and are securing a loan against it. With a residential mortgage, the interest decreases as you pay off more over the years but the opposite happens with a lifetime mortgage, as the interest increases up until when you die.
Residential mortgages are taken out over a set number of years and a lifetime mortgage is not agreed for a set period of time, the date it ends is when you die, which makes it hard to estimate the costs and compare against other financial options.
For people that would rather have the opportunity to spend the equity in their home and who are not planning on leaving all of their assets to their family, a lifetime mortgage is regarded to be a good option. Many homeowners have to sell their property and move house in order to release the equity in their home but this option gives you the opportunity to stay in your home and still access that cash.
You have the option of choosing a fixed or variable rate with a residential mortgage but with a lifetime mortgage the interest rate will always be fixed and currently a typical rate would be between 3.5% and 6%.
The different kinds of lifetime mortgage explained
There are a number of different types of lifetime mortgage available, which are explained below:
Roll Up Lifetime Mortgage
This type of equity release involves receiving a cash lump sum, as opposed to having gradual instalments of money. The interest builds up on the amount of cash loan you take out and the loan and interest is only paid when the last remaining homeowner either passes away or moves into long-term care. The interest in roll up arrangements is often referred to as compounded interest, where although your interest rate stays the same, due to the accumulation of interest, the amount owed continues to increase.
Drawdown Lifetime Mortgage
With the drawdown option, you have the option to release cash over multiple times, rather than just one lump sum. This means that when you take out your initial loan amount, you will be paying less interest than if you took the entire sum out at once. As you then take the rest of the amounts out, the interest will start to be added with each amount you take.
Flexible Lifetime Mortgage
The flexible lifetime mortgage allows you to flexibly make payments in order to keep the amount of interest down and ensure that the loan payback amount doesn’t escalate more than in needs to. These payments are voluntary and are ideal for people that want to access their home equity but don’t want it to impact their family’s inheritance too majorly.
Enhanced Lifetime Mortgage
This type of lifetime mortgage applies to people with certain medical conditions that are unlikely to live to the average life expectancy. Some people in this position are able to access more money, which they can use for medical treatment, or simply to live the rest of their life more comfortably.
Interest Lifetime Mortgage
This is where you are able to take out a lump sum of cash, with the agreement that you will pay the interest off each month. This means interest will not roll up but you must keep up the monthly payments, they are not voluntary like with the flexible lifetime mortgage.
Why choose a Lifetime Mortgage?
There are many different types of reasons that people choose a lifetime mortgage and whilst it is a good option for some people, there may be more suitable options available for others. However, the option to get money for your property without needing to move out is the big attraction for most. Also, if you are not worried about the escalating interest affecting your family’s inheritance then the decision is much easier to make.
Having access to a large sum of tax-free money during your retirement years opens up all kinds of opportunities from going on once-in-a-lifetime holidays to making home improvements or helping your children get on the property ladder with a deposit.
For many people, being able to see the impact of giving their family money whilst they are still alive is a big reason for choosing a lifetime mortgage.
There is also quite a lot of flexibility in how you want the lifetime mortgage to work in terms of interest payment options, so if you are worried about the compounded interest rates, you can avoid that by choosing the interest lifetime mortgage or the flexible lifetime mortgage.
What are the advantages and disadvantages of Lifetime Mortgages?
As with most significant financial decisions, there are advantages and disadvantage that you must consider before making your choice. Here is a summary of the main advantages and disadvantages:
- Spend your money whilst you can still enjoy it
- Avoid paying as much inheritance tax
- Relieve the stress of any debts
- Access a tax-free lump sum
- ‘No negative equity’ plans available
- Give financial support to your family before your death
- Flexible choices on the type of interest repayment plan you choose
- Stay in your home for the remainder of your life
- Provides money to spend on care if you need it
- Interest quickly mounts up
- Difficult to estimate total cost as it depends on the length of life
- Your family’s inheritance could end up being much less
- There are usually early repayment penalties
- Restricted if you want to move home
- May mean you lose means-tested benefits (pension credit, council tax benefit etc.)
Lifetime Mortgages are protected – you’re safe
If you decide that a lifetime mortgage is the right option for you then you will have peace of mind that you are protected both by the Financial Conduct Authority and the Equity Release Council. Make sure that you choose a reputable provider that is on the FCA register and is a member of the ERC to stay protected.
Boon Brokers would be happy to talk to you about your options to help you to decide whether a lifetime mortgage is the best choice for you and to discuss the other options that are available.
Gerard is a co-founder and partner of Boon Brokers. Having studied many areas of financial services at the University of Leeds, and following completion of his CeMAP and CeRER qualifications, Gerard has acquired a vast knowledge of the mortgage, insurance and equity release industry.