In this in-depth look into different types of mortgages on offer in the UK we will be discussing Lifetime Mortgages.
We will be looking at:
- What are Lifetime Mortgages?
- How do they work?
- What types of Mortgage are there?
- Why take out a such a Mortgage, and are they right for you?
- Things to consider before taking out a Lifetime Mortgage
What are Lifetime Mortgages?
Put simply a lifetime mortgage is one were the loan is secured upon your home but borrower (i.e. you) do not pay traditional monthly mortgage payments to reduce the loan amount and the loan is then repaid in the event that you die or go into long-term care.
The idea behind such lending products is that you can free up some of the equity in your home whilst still benefiting from your home ownership until, to put it bluntly, you are no longer in need of your property.
How do Lifetime Mortgages work?
A lifetime mortgage is a type of home loan that allows you to borrow money secured against your main residence, while you still retain ownership and live there. This means that you release the equity indoor home but remain living in your home and main residence until the property is sold and used to repay the loan.
As there is still a loan secured on your home interest is still being charged on what you have borrowed but the interest can be repaid to keep the cost down or added on to the total loan amount if you wish.
The home still belongs to you and you are responsible for maintaining it during the ‘lifetime’ of the mortgage and depending upon your needs a typical lifetime home loan is then repaid in the event of death, or if the borrower enters into long-term care.
The amount of equity that is released depends upon your personal circumstances and requirements. If you do not wish to take all of the equity in your home or do not need all of the equity, you can opt to ring-fence a portion of the property value as an inheritance for your family.
Additionally, some providers may be able to offer some homeowners a larger sum in ‘equity release’ if the borrower has certain medical conditions, or even ‘lifestyle factors’ such as smoking which have a bearing on the likely term needed for the loan.
The mechanism to repay the loan is that when you die or you move into long-term care, the property is then sold and the proceeds from the property sale are used to repay the loan.
The housing market does change and if the market improves and your home is sold for more than was originally thought, any proceeds that are left over from repaying the loan will go to your estate and beneficiaries.
Furthermore, if your estate has sufficient funds to repay the mortgage without having to sell the property the beneficiaries can choose to do so.
Conversely if there is not enough money left from the proceeds of sale, your estate would have to repay any extra sum that was required over and above the value of your home from your estate, to clear the remaining loan.
To guard against this eventuality, most lifetime mortgages do offer a ‘no-negative-equity guarantee’. This Equity Release Council standard offers peace of mind and safeguards your estate and beneficiaries becoming liable if your property sale isnt sufficient to clear the loan.
With such a ‘no-negative-equity’ guarantee the lender promises you (or your beneficiaries) will never have to pay back more than the value of your home. Whilst this is important if the property market dips, it is also the case even if the debt has become larger than the property value.
What types of Lifetime Mortgage are there?
There are two main types of lifetime mortgages to choose from which have two very different cost and equity release structures:
An interest roll-up mortgage: this type of mortgage is were you get a lump sum (i.e. equity release) or are paid a regular amount.
With the interest roll-up the interest you are charged (for the loan) is added onto the loan i.e. rolled-up.
The interest continues to accrue during the mortgage term but the roll-up means you don’t have to make any regular interest payments. The amount you have borrowed, including all the rolled-up interest, is repaid at the end of your mortgage term and your home is sold.
As you might expect, as no interest is being repaid during the mortgage term this will have an impact on the amount of equity release lump sum or regular payments to you.
An interest-paying mortgage: with this lifetime mortgage you get a lump sum as normal but instead of letting the interest ‘roll up’ and accrue you make monthly repayments or even ad-hoc repayments to reduce, or stop the impact of interest being rolled-up.
Some lifetime products also allow you to pay off part of the loan capital, if you so wish. This could be timed to when investments are maturing or other property is being sold.
In most lifetime home loans the amount you borrowed is repaid when your home is sold at the end of your mortgage term, upon death or going into nursing care, but if you think there is a chance of you receiving funds during the mortgage term that could repay the loan a more flexible product, that allows capital repayment maybe more suitable.
Why take out a Lifetime Mortgage, and are they right for you?
Lifetime mortgages are a valuable option for long term financial planning as put simply, they allow you to use the equity in your home before your death, whilst still allowing you to live in your home.
When taking out a lifetime mortgage, you can choose either to borrow a lump sum at the start of the mortgage or take an initial lower lump sum amount with the option of a drawdown facility.
This drawdown facility is suitable if you want to take regular or occasional small amounts, perhaps to top up your income, or enjoy the benefits of your retirement.
Rather than one big loan at the outset the flexible drawdown means you only pay interest on the money you actually need and have borrowed, which keeps the interest charged lower and reduces the overall cost.
Things to consider before taking out a Lifetime Mortgage
As with any mortgage your personal circumstances can affect the options available to you and the advice given.
With a lifetime mortgage however, unlike a traditional mortgage to purchase a home, your credit record isnt the determining factor and your age, health and personal circumstances are more important.
Here are some factors to think about in considering a life time mortgage
- The amount of loan, any equity release amount plus the mortgage term and associated interest costs might affect what you leave as an inheritance so get advice.
- With an interest roll-up mortgage, were no interest is being repaid till the term ends the total amount you owe can grow quickly. In some circumstances this might result in you owing more than the value of your home. Make sure your mortgage includes a Equity Release Council standard ‘no-negative-equity’ guarantee.
- A mortgage with variable interest rates might not be suitable for your needs. If the interest rates were to rise significantly if could affect the monthly interest repayments or if the interest is rolled up it could affect the total amount you owe as per above. However, another of the Equity Release Council standards states that if the interest rate is variable there is an upper-limit ‘cap’.
- The equity release lump sum may affect your tax position and any entitlement to means-tested benefits so this is something to consider when weighing up the lump sum versus flexible drawdown option.
- Lenders will expect you to keep your home in good condition within the framework of “reasonable maintenance” so check what conditions will the scheme put on you when you carry on living in the home?
- Should you need the option, can you transfer the scheme if you want to move home?
- What happens if you die soon after taking out the scheme?
- What fees are payable if you decide to repay the loan, say after three years?
- Would you qualify for a grant to help you pay for home repairs or alterations?
- What happens if you end up owing more than the home is worth? (Many providers now provide a no-negative equity guarantee.)
- Whilst bad credit doesn’t generally have a bearing on a lifetime mortgage, Bankruptcy and IVAs could have an impact so if you have been subject to either, check the terms of your Bankruptcy/IVA with your mortgage advisor
Mortgage Success Ltd is a Whole of Market, Manchester based Mortgage Broker covering the whole of the UK.
We have nearly a decade working in the Financial Services industry for Banks, Mortgage Lenders, Insurers and other brokerages giving us the confidence and experience needed to get you the Mortgage you want.
Whether the mortgage you want is for a house purchase, bad credit home mover, equity release or as talked about today a Life-time mortgage simply get in touch for a no obligation discussion.