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A lifetime mortgage can be a great way to access the equity in your home, allowing you to make the most of your property’s value without needing to move out. Lifetime mortgages provide a secure way to access your money and can give you the financial freedom to enjoy your retirement.
Here, Proper Finance aims to explore the ins and outs of lifetime mortgages and how they can be helpful for those looking for a retirement supplement.
What Is a Lifetime Mortgage?
A lifetime mortgage is a type of loan that allows homeowners aged 55 or over to access the equity in their home tax-free.
This loan is secured against the value of the property and typically does not require any monthly repayments. Instead, the loan and any interest is usually repaid when the house is sold or the homeowner passes away.
Lifetime mortgages are a great way to access additional funds without having to move out of your home or make any monthly payments. Whether you are looking to pay off your existing mortgage, or just free up some money to enjoy your retirement, a lifetime mortgage could be a good option.
What Are the Benefits of Lifetime Mortgages?
The main benefit of a lifetime mortgage is that you can access the equity in your home without having to move out. This can be useful if you want to access a large lump sum of money to pay for something, such as home improvements, medical bills, or even your existing mortgage.
Another benefit is that the loan is repaid from the sale of the property, so homeowners do not have to worry about repaying the loan while they are alive. This can be a great option for those who are retired and do not have a steady income.
The cash you receive when you take out a lifetime mortgage is tax-free. It can either be delivered as a lump sum or in small monthly installments, and can be used however you prefer.
Finally, a lifetime mortgage can help you create an inheritance for your family. If the value of the property increases, your family will benefit from the increase in value when the loan is repaid.
What Are the Downsides of Lifetime Mortgages?
One large downside is that the interest can build up quickly. If you choose not to repay the interest until you die, the interest can build up to the level where this option might not even be worth it. The interest rates for a lifetime mortgage tend to be higher than those of traditional mortgages.
Releasing equity will also reduce how much your beneficiaries will eventually inherit. Although a proportion of your property can be reserved for them, this would be less than the 100% that they would have otherwise inherited.
Another thing to watch out for is that taking out a lifetime mortgage might impact your entitlement for means-tested benefits.
Finally, when you are choosing which lifetime mortgage to take out, keep an eye out for early repayment charges. These fees can be steep.
Am I Eligible For a Lifetime Mortgage?
Your eligibility will depend on your mortgage provider, but generally:
- You must be aged at least 55.
- You must have little or no mortgage left to pay on your home.
- Your home must be under your name, not rented.
- Your home must be worth at least £70,000.
How Much Does a Lifetime Mortgage Cost?
When considering the cost of a lifetime mortgage, you must consider the interest rates and the additional costs.
The interest rates charged by the loan will affect how much you must pay back. Interest on lifetime mortgages can tend to be quite high.
The additional costs can include arrangement fees, advice fees, and solicitors fees.
How Do I Take Out a Lifetime Mortgage?
The percentage of your property that you can borrow against will increase the older you are. People in their late 60s, for example, might be able to borrow as much as 50% of their property value.
You will also have to consider the value of your home. Normally, lenders state a minimum home value of £70,000, although it can be higher too.
You will need to consider how much of your property you want to borrow against, and then arrange this with your mortgage provider.
What Are the Types of Lifetime Mortgage?
These are the common types of lifetime mortgage:
- Lump sum: You receive a lump sum of cash. The interest payable is compounded year on year until you die.
- Drawdown: You take a smaller amount of money at the outset, then draw down any further money as needed. You only pay interest on the money you take out.
- Interest repayment: You can pay off some or all of the interest during the life of the loan.
- Enhanced lifetime mortgages: These are available to people with shorter life expectancies, as the lender expects to sell their share of your property sooner.
What Are the Alternatives to a Lifetime Mortgage?
In recent years, a new set of mortgage options for older borrowers have been launched, allowing people to borrow against their property in later life but retaining the ability to pay down some of the debt.
Retirement interest-only mortgages allow you to take out a mortgage in retirement, and many only require repayment on death, when the homeowner goes into care or the property is sold.
You are only required to pay off the interest on the loan each month, not the capital value of the loan. If you can afford the repayments, this means that only the loan is repaid when the property is sold, so more could be left behind for your heirs.