A lifetime mortgage is a loan secured by your home that does not have to be repaid until you die or enter long-term care. It frees up some of the wealth you have locked up in your home while still allowing you to live there. Let’s look at the different types of lifetime mortgage as well as the interest rates.
What is a Lifetime Mortgage?
Unlike traditional mortgages, where interest is charged on a decreasing sum over time, interest on lifetime mortgages is charged on a growing sum, so your debt can quickly grow.
Because you don’t make any repayments, the loan’s interest is added to your debt on a continuous basis.
The majority of lifetime mortgages have a set interest rate. Variable-rate lifetime mortgages are available from some lenders, but they provide less stability.
You will never have to return more than the value of the property, as members of the Equity Release Council, a trade organisation for scheme providers, have guaranteed that consumers who take out the product will never be in this situation.
What is the Process of Obtaining a Lifetime Mortgage?
A lifetime mortgage is intended to last your entire life, with interest compounding over time. There is no requirement to make monthly payments, but you have the choice to do so if you so desire.
As a result, the full sum, plus interest, is not required for repayment until you die or enter permanent long-term care. It is normally cleared at this time with the sale of the residence.
How can I Apply for a Lifetime Mortgage?
Equity release providers have stringent lending standards, such as a minimum age of 55 or 60.
Your age determines the percentage of your property that you can borrow against; the older you are, the more you can borrow.
At 65, you can typically borrow 25% to 30% of your income. If you’re over the age of 25, you can borrow up to 50% of your income.
There are also loan minimums, which can range from £10,000 to £45,000. Your home will almost certainly have to fulfil a minimum value standard as well (often £70,000 to £100,000).
What are the Types of Lifetime Mortgages?
#1. Lump sum Payment
The most basic type of lifetime mortgage is a lump-sum loan in which the interest is ‘rolled up’ over the entire duration.
There are no payments for the rest of your life, but interest accumulates year after year until you die (or move into a residential care home).
Lifetime mortgage interest rates are typically fixed at the commencement of most lump-sum transactions on lifetime mortgage.
#2. Drawdown
Some companies provide a flexible lifetime mortgage, in which you take a smaller amount at the start and then draw down additional funds as needed.
Because you only pay interest on the money you borrow, the overall cost might be significantly lower.
#3. Interest Repayment
Allowing borrowers to pay down some, or all, of the interest throughout the life of the loan, is another way to cut costs. Hodge Lifetime, Stonehaven, and More2Life are all offering this as an option.
#4. Enhanced lifetime mortgages
Some providers give additional money to people who have a shorter-than-average life expectancy. These mortgages are available from Aviva, More2Life, and Just Retirement.
Who can get a Lifetime Mortgage?
To be eligible for equity release through a lifetime mortgage, you must meet the following requirements:
- You must be over the age of 55.
- Own or wish to own a home in the United Kingdom valued at least £70,000.
- I’d like to release at least £10,000.
How much do Lifetime Mortgages Cost?
Before proceeding, ensure that you are fully aware of all costs.
You may be required to pay:
- insurance for buildings
- legal and valuation costs
- a product arrangement charge to the lender
- a charge to an adviser for their advice and assistance in setting up the scheme
- A completion charge, which can be paid upfront or added to your mortgage.
These costs could total between £1,500 and £3,000 in total.
Paying off your loan early may incur additional costs known as ‘early repayment charges.’
You must be as certain as possible that an equity release plan is appropriate for you.
Is a Lifetime Mortgage suitable for me?
If you meet the following criteria, releasing equity with a Lifetime Mortgage may be the best option for you:
- are over 55 years old
- would like to borrow at least £10,000
- You possess a home valued at at least £70,000.
Check out the equity release calculator to get an idea of how much you could release. You will receive an estimate in minutes as well as a free guide to equity release.
What is the amount of equity I have in my home?
Your equity is the worth of your house less any loans secured against it: a £350,000 home with a £50,000 mortgage leaves £300,000 in equity.
What is the distinction between equity release and a lifetime mortgage?
Equity release allows homeowners to keep their home while earning an income or receiving money from it. One of the two primary forms of equity release solutions is a lifetime mortgage, the other is a home reversion plan.
Why should you get a lifetime mortgage?
The long-term trend of growing property prices has been maintained, and prices have enjoyed a minor boom despite the coronavirus outbreak. The lifetime mortgage, along with low-interest rates and economic instability, means that for many over-55s, their home is their most valuable financial asset.
Flexible options offered by Equity Release Council-approved lenders might also help you decide whether to go with a lifetime mortgage. These are some examples:
- Fixed interest rates for the rest of your life.
- A no-negative-equity guarantee ensures that you will never owe more than the value of your home.
- The ability to shift and transfer your lifetime mortgage at a later date, subject to the lender’s restrictions.
Other benefits of lifetime mortgages include:
- Flexibility – Some programmes allow you to take as little as £10,000 tax-free and save more for when you need it.
- Security — With all lifetime mortgages, your home is still yours – you’ve only borrowed against it.
- Control – There are numerous techniques for mitigating the burden of accumulating interest over time. A drawdown lifetime mortgage allows you to build an equity reserve that is interest-free until accessed, although certain lifetime mortgages allow you to clear the interest monthly, which can significantly reduce the cost of borrowing.
Lifetime mortgages drawbacks
While equity release allows you to borrow against the value of your property, there are numerous negatives to consider:
#1. Cost
This figure can be quite high. In other situations, it may deplete practically all of the value of your home, leaving nothing for your heirs.
#2. Penalties for early payback
The majority of equity release programmes do not allow you to pay down the loan and are predicated on interest accruing throughout the entire duration.
If you wish to stop the contract early, carriers will charge you an early repayment fee. The lifetime mortgage rates are frequently based on current government bond (gilt) rates and are opaque.
#3. Moving issues
Although loans made with members of the Equity Release Council (ERC), the providers’ trade organisation, are ‘portable,’ meaning you can transfer from one property to another, shifting can be problematic if the new property is more expensive than the equity remaining in your old one.
Certain properties, such as sheltered housing, are not always suitable for lenders since they can be difficult to sell.
#4. Means-tested benefits are being phased out.
If you withdraw money from your home equity, you may lose your eligibility for pension credit and council tax benefits.
Questions to ask your adviser if you’re thinking about getting a lifetime mortgage
If anything isn’t clear, always ask questions.
Here are some critical questions.
- What if you pass away soon after taking out the lifetime mortgage?
- What impact would the lifetime mortgage have on your state or local government benefits?
- Is it possible to transfer the lifetime mortgage if you move?
- What fees would you have to pay if you opted to repay the loan?
- Would you be eligible for a grant to assist you in paying for house repairs or alterations?
- What restrictions does the lifetime mortgage impose on you if you continue to live in the house?
- What if you wind up owing more than the property is worth? (Many suppliers now offer a guarantee against negative equity.)
Lifetime Mortgage Interest Rates
Most lifetime mortgage have a fixed interest rate for life, and while variable rates are available, most people prefer fixed rates since you can see exactly how the amount you owe varies over time and you are shielded from any rate increases.
Variable rate programmes may begin with a cheaper rate but gradually increase. However, with lifetime mortgages from lenders certified by the Equity Release Council, any product with a variable interest rate will have an upper rate cap that it cannot exceed.
Interest Only Lifetime mortgages
You may wonder if you can pay interest on the amount you release as you go rather than allowing interest to accumulate on the loan.
Many of the solutions on the market today allow you to choose from a variety of flexible features, such as the ability to make voluntary payments on the interest of your lifetime mortgage. Many lenders may allow you to repay up to 10% of the amount borrowed per year, but you might also choose an interest-only plan. By paying the interest on a monthly basis, you can keep the amount you owe from increasing over time, lowering the overall cost of borrowing.
Any payments you make towards the interest are entirely optional, and you can stop making them at any time without consequence. Instead, the interest will resume rolling on the amount owed.
What Alternatives are there to Lifetime Mortgages?
In recent years, a new set of mortgage choices for elder borrowers has been introduced, allowing people to borrow against their property in later life while still being able to pay off some of the loans.
Retirement interest-only mortgages allow you to take out a mortgage while you are retired, and many only require payments upon death, when the homeowner enters care, or when the property is sold.
You are simply obligated to pay the interest on the loan each month, not the loan’s capital value. If you can make the payments, this implies that when you sell the property, only the loan is returned, leaving more for your heirs.
Lifetime Mortgage FAQs
Is there a better alternative to equity release?
There are numerous alternatives to Equity Release that I routinely discuss with customers. Selling assets, remortgaging, asking for aid from family and friends, grants, moving to less expensive property, state benefits, renting a room, budgeting, changing jobs, or simply doing nothing are all options.
Can you buy a property with a lifetime mortgage?
A lifetime mortgage or equity release can be utilised to purchase a property to live in. This implies that the equity in any property you’ve sold, or any existing savings, can be used as the deposit, with a lifetime mortgage covering the rest of the purchase price.
Can you move house with a lifetime mortgage?
You may transfer your lifetime mortgage to your new house if you have one. If you have a home reversion plan, however, you will not own all of your property.
