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How does a lifetime mortgage work?
Lifetime mortgages allow homeowners who are aged over 55 to borrow money against the value of their main residence, whilst still retaining 100% ownership. This money (equity) will usually have built up over a number of years, primarily due to a combination of reduction in mortgage balance, and the property value increasing over time. They are the most popular type of equity release plan.
All lifetime mortgages are covered by the Equity Release Council standards which include a no negative equity guarantee. This guarantees that the lender promises that you (or your beneficiaries) will never have to pay back more than the value of your home. This protection only kicks in should the debt ever become larger than the property value.
Interest is charged by the lender on the amount outstanding and added monthly or annually dependent upon lender. This interest will compound thereafter, and if no payments are made, the balance will increase for the rest of your lifetime. Options are available to repay interest charged using voluntary payments or interest only plans, thereby controlling the future balance.
The plan is eventually repaid upon death, or long term care of the surviving partner, usually by selling the house to repay the lifetime mortgage, with any balance remaining passing into the estate and distributed accordingly. Lenders typically allow 12 months for this repayment process to be completed.
The amount that can be borrowed is calculated taking the age of the youngest applicant, value of the property, postcode and also health and lifestyle of the individual. Essentially, the older you are, the higher the maximum loan becomes. Typically, you could release 28% of the property value from age 55, rising upto 58% by age 83.
With a lifetime mortgage the lender must be the only security on the property. Therefore, any other mortgage must be repaid, either before or upon completion of the new plan. Your home cannot be repossessed – which is always a possibility with any residential mortgage - including retirement and RIO mortgages.
How much can I borrow with a lifetime mortgage?
Lenders only use three very simple criteria to decide how much they are prepared to lend you. These are the value of
your property (which must be at least £70,000), the age of the youngest homeowner (55 or above) and where you live
(your postcode).
If you have any health conditions (however minor) please makes sure that your Equity Release Supermarket adviser
knows about them, as you may be able to borrow more using an enhanced
plan.
Our simple calculator will give you an idea of the maximum amount you could borrow with results from a number of different lifetime
mortgages - standard lump sum, interest only and enhanced lifetime mortgages.
We also offer free to use calculators for every type of lifetime mortgage currently available by visiting our equity release calculator page.
What are the different types of lifetime mortgage?
There are a range of lifetime mortgages available, each designed to meet different needs. These are –
Drawdown lifetime mortgage
The most popular type of lifetime mortgage. The lender provides a cash facility which once you have withdrawn an initial £10,000, you are free to borrow against in the future, without additional charge. Could be ideal if you want to borrow smaller sums and could help to reduce the interest accruing as interest is only payable on the amount borrowed.
Read more.
Lump sum lifetime mortgage
Enables you to borrow the maximum available as a ‘one-off’ amount. Could be ideal if the plans for your money include ‘big ticket’ expenses.
Read more.
Interest only lifetime mortgages
Interest only plans provide an initial capital lump sum. Following release, monthly interest repayments are made which means that only the initial amount borrowed is repaid when your plan ends.
Read more.
Voluntary payment lifetime mortgages
A feature of lifetime mortgages which allows you to repay upto 10%-15% of the initial amount borrowed per annum. By making ad-hoc payments, you could control the future balance by choosing how much capital could be repaid.
Read more.
Advantages and disadvantages of lifetime mortgages
Advantages
There are no eligibility ‘checks’ to pass
Lenders do not access your income and there are no affordability checks to pass as there are with residential mortgages. Some lenders do not conduct credit checks upon application.
Your home remains 100% in your ownership
With a lifetime mortgage you are borrowing against the equity built up in your property and so you retain absolute ownership of your home.
You can move home in the future
All lenders who are members of the Equity Release Council must allow you to move home and ‘port’ or transfer your lifetime mortgage to your new home without penalty.
Ability to repay in full without penalty
On some joint plans, should one one person die or move into care, the surviving partner can repay the loan without penalty as long as this occurs within 3 years of the death of the partner.
Usually have fixed interest rates for life
For added peace of mind, the majority of lifetime mortgages come with fixed rates for the lifetime of the loan – so you don’t have to worry about fluctuating interest rates as you do with residential mortgages.
Your money is tax-free upon release
The money raised from a lifetime mortgage plan is tax-free in your hands, and yours to spend as you wish.
Disadvantages
The inheritance you leave will be smaller
As you have withdrawn equity from your property, and this will have then accrued interest, it will have reduced the amount of inheritance you can pass down to your beneficiaries.
Interest rates can be higher
Compared to retirement and residential mortgages, interest rates on lifetime mortgages can be higher at the maximum loan-to-value end.
The amount you can borrow is typically smaller
Retirement or RIO mortgages – the other borrowing options for older homeowners, can usually go as high as 70% loan-to-value size, compared to a maximum of 58% currently for a lifetime mortgage
The younger you are, the less you can borrow
As lenders LTVs are on a ‘sliding scale’ based upon your age. As an examply at age 55 you can raise from 28% LTV.
Means-tested benefits could be impacted
Any means-tested benefits you currently claim for could be impacted as your ‘money in the bank’ could exceed the benefit(s) eligibility threshold.
Early repayments charges may be payable
As lifetime mortgages are designed for the long term, if you repaid your lump sum lifetime mortgage early, you may be subject to a penalty. These early repayment charges could be as high as 25% of the amount borrowed, however depending on your equity release provider they could also taper over a fixed number of years.
These are lifetime mortgage and home reversion schemes. To understand their features, benefits and risks, please contact Equity Release Supermarket for a no obligation, personalised, key facts illustration. All equity release quotes can be tailored to your own circumstances and you are under no obligation to proceed. Use our equity release calculator to work out how much money you can release from your property.
