Lifetime Mortgages are a method of releasing equity from your home. They provide you the facility to take out a loan that is secured on your property and which only needs to be repaid when you die or leave your house to go into long-term care. In the meantime, you will be able to continue to live in your home and can take advantage of the money that is tied up in your home.
How Do Lifetime Mortgages Work?
A Lifetime Mortgage works in a similar way to a conventional mortgage in that you borrow money that is secured against your home. However, there is one significant difference: the interest on your Lifetime Mortgage is added on to the total loan and is repaid when you die or move out of your home as outlined above. Anything remaining in your estate is left to your beneficiaries and is subject to Inheritance Tax above the prevailing threshold.
There is a risk that the total amount of Lifetime Mortgage will be worth more than the value of your home when the time comes for your house to be sold. This could result in your beneficiaries being asked to pay for the difference so a ‘No-Negative-Equity Guarantee’ has been put in place by reputable lenders to guard against this
It works by guaranteeing that you or your beneficiaries will never have to pay back more than the value of your home, even if the debt exceeds its value.
Types Of Lifetime Mortgages
There are three different types of Lifetime Mortgages and each has different features:
1. ROLL-UP MORTGAGE
A Roll-Up Lifetime Mortgage provides you with a lump sum or regular income. You do not need to make any repayments on loan and the interest is added on a regular basis in a compound way so that it ‘Rolls Up’ until the loan is repaid. This means that the total amount you owe can grow quickly and you might find that the total amount you owe – including capital and interest – is more than the value of your home. This is where you should ensure you have a No-Negative-Equity Guarantee, as outlined above.
2. FIXED-REPAYMENT LIFETIME MORTGAGE
Fixed-repayment Lifetime Mortgages provide you with a lump sum but without any interest being charged it. Instead, the amount of money that is repaid is more than the lump sum you originally took out. This amount is agreed between you and the lender at the outset.
You will benefit from a Fixed-repayment Lifetime Mortgage if you live much longer than the lender thinks you will – but you will get a worse deal if your home is sold much earlier than you planned.
3. INTEREST-ONLY MORTGAGE
Interest-Only Lifetime Mortgages provide you with a lump sum, just like the two other Lifetime Mortgages outlined above, but you make monthly payments of the interest due on the loan. This means that the amount you originally borrowed is repaid when your home is eventually sold but this sum will not have increased because you will have paid off the interest.
The key advantage of Interest-Only Lifetime Mortgages is that you know exactly how much money will be repaid when your home is sold and so you have control over the amount of money left in your estate to bequeath to beneficiaries.
However, you will need to ensure that you have enough income each month to afford the payments.
Factors For Consideration
If you are considering taking out a Lifetime Mortgage to release equity from your house, here are some factors to consider:
- You may lose entitlement to any means-tested state benefits that you claim (excluding the basic state pension as this is not means tested).
- By signing-away a proportion of your home to a lender in exchange for your Lifetime Mortgage you will be reducing the amount of money left in your estate for beneficiaries to inherit.
- You will need to keep your home in good condition as this is a requirement from lenders of Lifetime Mortgages.
What Does A Lifetime Mortgage Cost To Arrange?
There are a number of costs associated with taking out a Lifetime Mortgage and these include:
- An arrangement fee which is payable to the lender of the Lifetime Mortgage.
- Valuation fees which will be used by a surveyor/valuer to ascertain the value of your home.
- Legal fees which will be paid to solicitors to draw up the necessary paperwork.
- Buildings insurance in order to insure your home.
- Fees to an equity release consultant for their advice in helping you to arrange the Lifetime Mortgage.