A lifetime mortgage is – like any other mortgage – a long-term loan secured against your home. It has to be repaid when you either die or go into long-term care.
How they work
Most lifetime mortgages have fixed rates of interest. Some providers offer variable rates, but these offer less certainty as they are subject to fluctuations in the lending rates. This is probably the last thing you need once you have retired and set a budget.
Unlike standard conventional mortgages where interest is charged on a loan that decreases with time, the interest on a lifetime mortgage is charged on an increasing sum, meaning that your debt can grow quickly.
This is because you never make any repayments, so the interest on your loan is therefore added to the debt on a continual basis.
You’ll never have to repay more than the actual value of the property. The Equity Release Council (ERC) (the trade body for providers of lifetime mortgages) has guaranteed that anyone who takes out the product won’t ever find themselves in this situation.
Lifetime mortgages: lending criteria
Equity release providers have some very strict lending criteria such as a minimum age, which is normally between 55 and 60.
The percentage of the value of your property that you can borrow against is dependent upon your age. The older you are, the more you can borrow.
At 65, you can normally only borrow 25% to 30% of the value.
However, you can often borrow as much as 50% if you are aged 65 or above.
Minimum loan requirements
Most banks and building societies range from £10,000–£45,000. Your home will probably need to be worth at least £70,000 to £100,000 to qualify.
DIFFERENT KINDS OF LIFETIME MORTGAGES
The most basic form of lifetime mortgage is a lump-sum loan.
The interest payable is ‘rolled up’ over the full term of the loan.
You pay nothing for the rest of your life, but interest is compounded (added year on year) until you die (or are moved into a residential care home). For most lump-sum lifetime mortgages, interest rates are fixed at the outset.
Some companies offer a flexible lifetime mortgage. This means that you can take a smaller amount at the outset and then draw down further borrowings if or when required. Since you only pay interest on the money you’ve borrowed, the total cost can be considerably lower.
Interest repayment option
Some mortgage providers allow borrowers to pay off some, or all, of the interest during the term, but do check with your lender as there are not many providers that offer this service – and of course the more options you have, the more likely it is to cost you more.
Enhanced lifetime mortgages
Some providers offer more funds to those with shorter life expectancies, such as smokers, heavy drinkers and those with long-term ailments.
Lifetime mortgages: drawbacks to consider
While equity release mortgages offer the chance to release at least some of the value of your home, there are several important drawbacks that need to be considered.
This can be very high indeed. In some cases, the costs involved may drain almost all of the value of your home. This may not be a problem for you, but there may be little left over for your heirs.
Early repayment penalties
Most equity release schemes don’t permit you to pay off any of the loan because the initial rate set is based on interest gradually building up over the full term. If you decide that you want to end the deal prematurely, providers may demand a high early repayment charge.
Nearly all loans arranged with members of the Equity Release Council are ‘portable’.
This means that you can transfer your mortgage from one property to another, However, moving can be difficult if the property you want to move to is more expensive than the equity remaining in your current property. Also, some properties, such as sheltered housing, are rarely acceptable to lenders as they can prove hard to sell.
Loss of means tested benefits:
Drawing extra money from the equity in your house may mean loss of eligibility for pension credit and council tax benefits.
Taking out a lifetime mortgage is a major decision not just for you but for your entire family, and it should not be entered into lightly.
In all cases, we strongly recommend that you take advice from a fully qualified and FCA registered independent financial adviser.