Lifetime Mortgages and later life borrowing
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Lifetime Mortgages and later life borrowing
If you’re looking at ways to borrow money against your home for retirement, a lifetime mortgage can be a helpful option. We’ll help you understand how it works and what to consider.
What is a lifetime mortgage?
A lifetime mortgage is a way of releasing some of the money tied up in your home. It’s a form of borrowing that is only available to people aged 55 or over.
The amount you can borrow will depend on the value of your home and your age. You will not have to pay interest or repay the loan in your lifetime. The debt is settled by selling your home after you die or move into long term care.
How does a lifetime mortgage work?
Generally, lifetime mortgage lenders will let you borrow around 50% of the value of your home. Some will go as high as 60%.
Lifetime mortgages are available to anyone over the age of 55 who owns their own property and is resident within the UK for at least six months of the year. You can only use your main residence as security for the mortgage.
You can choose whether to receive the loan as a single lump sum, or to draw down money as you need it.
What are the most common reasons for taking a lifetime mortgage?
There are lots of reasons why people look at a lifetime mortgage. Some of the most common ones include:
- Not wanting the stress of downsizing to access equity
- To boost retirement funds
- To pay off an interest only mortgage that is ending
- To fund home improvements and adaptations
What are the pros and cons of a lifetime mortgage?
The big advantage of a lifetime mortgage is that it is a helpful way to access the value locked up in your home, without having to sell it.
The housing market is notoriously competitive and it may be difficult to find a suitable home to downsize into. Moving can also be costly and stressful. Taking a lifetime mortgage is much more straightforward and usually has fixed monthly interest rates.
In terms of the disadvantages, a key consideration is the interest on your borrowing. Like a standard mortgage, a lifetime mortgage charges compound interest. If you don’t pay the interest at regular intervals, the entire sum will compound. At a 5% interest, the amount you owe would double every 15 years – which could mean a much smaller inheritance for your family.
An important thing to note is that, today, lifetime mortgages have a ‘no negative equity’ guarantee – which means you can never owe more than your home is worth.
You can address the risk of the growing debt by paying off the interest as you go. Alternatively you can take a ‘drawdown’ option and access money when you need it. Because you only pay interest on the sum you borrow, this can be a cost-effective approach.
Another potential disadvantage of a lifetime mortgage is that if you change your mind and want to pay it off, you will face an early repayment charge.
What are the different types of lifetime mortgages?
There are different options of lifetime mortgage to choose from, which vary in how interest is charged and how you receive your loan amount.
Lump sum interest roll-up – a standard form of lifetime mortgage where you take all the money as a tax-free lump sum at the beginning. There’s no requirement to make any repayments or pay the interest.
With this type of mortgage you can take a small amount at the outset and then access further money when required. This option is popular with those looking to boost their retirement income.
This type of lifetime mortgage allows you to service the interest so that you reduce the amount owed at the end of the loan. Some lenders may conduct an affordability assessment to check you have enough income to cover the interest payments.
Enhanced lifetime mortgages
Some lenders will assess the health and lifestyle of applicants and may offer higher (enhanced) sums to those with a lower life expectancy.
Is a lifetime mortgage right for you?
For some people, a lifetime mortgage is a great solution – but it is not ideal for everyone. With any type of equity release it’s crucial to get professional financial advice from someone that knows this part of the market.
We will spend time exploring your specific situation in order to give you recommendations and advice that will work for you. There are lots of things to consider, including how a lifetime mortgage might affect your tax position and whether it will impact means tested benefits. We’ll help you look into all these areas.
Mortgages by Mcateer Ltd is an appointed representative of The Openwork Partnership, a trading style of Openwork Limited which is authorised and regulated by the Financial Conduct Authority.
A lifetime mortgage is not suitable for everyone and may affect your entitlement to means tested benefits, so it is important to seek financial advice before taking any action. If you are considering releasing equity from your home, you should consider all options available before equity release.
The interest that may be accrued over the long term with a Lifetime Mortgage, may mean it is not the cheapest solution. As interest is charged on both the original loan and the interest that has been added, the amount you owe will increase over time, reducing the equity left in your home and the value of any inheritance, potentially to nothing.
Although the final decision is yours, you are encouraged to discuss your plans with your family and beneficiaries, as a Lifetime Mortgage could have an impact on any potential inheritance. We would also encourage you to invite them to join any meetings with your Financial Adviser so they can ask questions and join in the decision, as we believe it is better to discuss your decision with them before you go ahead.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
Approved by The Openwork Partnership on 05/01/2024.