A lifetime mortgage is the most popular form of equity release, but is it for a good reason?
With products more flexible than ever, and over 600 plan types available, should you be next?
Is a lifetime mortgage too expensive or a good idea?
We’ve got the answers right here.
Through this article, we’ll help you discover:
- What’s a lifetime mortgage and how does it work?
- The benefits of a lifetime mortgage.
- The types of lifetime mortgage plans available.
Our expert team of SovereignBoss journalists regularly reviews our articles and the latest industry news, to ensure we’re bringing you the most up-to-date information about the retirement market.
Here’s what’s happening with lifetime mortgages in 2022.
Check this out!
What’s a Lifetime Mortgage?
A lifetime mortgage is a loan against the value of your primary residence, designed for homeowners aged 55 and up.
These flexible products allow you to voluntarily repay portions of the loan and monthly interest.
Whatever’s not repaid in your lifetime will be recovered through a property sale when the last homeowner passes away or moves into long-term care.
How Does a Lifetime Mortgage Work?
A lifetime mortgage works either as a joint or as an individual plan.
If you and your partner are 55 or older, you select a joint lifetime mortgage product, so you both have the right to remain on the property until you pass away.
Or, if you unlock an individual plan, your home will be sold when you pass away, even if you’re outlived by your spouse.
Your spouse will need to use alternative means to repay the loan, should they wish to retain ownership of the property.
With a lifetime mortgage, your home serves as collateral against the secured loan.
Why Choose a Lifetime Mortgage?
You may choose a lifetime if you’re a property owner over 55, in need of tax-free cash, have no additional financial means, and won’t pass the affordability checks implemented for standard loan or mortgage products.
However, a financial advisor will help you determine if equity release is the correct solution for your financial needs.
Advantages of a Lifetime Mortgage
The advantages of a lifetime mortgage include gaining access to tax-free cash with no obligatory monthly payments attached.
Here’s more information.
The cash you unlock through a lifetime mortgage plan is completely tax-free.
The reason for this is that it’s seen as a loan and not income.
Spend It How You Want
You can spend the equity you unlock through a lifetime mortgage in any way you wish, with no limits.
However, it’s important to spend cautiously and implement a financial plan with the assistance of a financial advisor.
Nothing to Repay
There’s zero obligation to repay the loan or compound interest in your lifetime.
Instead, the loan and compound interest are covered by your property sale’s income once you’ve passed away or relocated to long-term care.
Despite payments being non-obligatory, you have the option of flexible repayments if you wish to reduce the total amount owed on your lifetime mortgage product.
You can opt to repay between 10% and 40% of the loan annually, but the maximum percentage is lender dependent.
Additionally, repaying the monthly interest will prevent it from compounding, sometimes drastically reducing the overall loan value.
Stay In Your Home
A lifetime mortgage grants you lifelong access to your property.
To maintain your lifetime mortgage loan agreement, the home from which you unlock cash must remain your primary residence.
This means living there for at least 6 months each calendar year.
You Can Still Move House
If your circumstances shift, you can still move house with a lifetime mortgage.
Your options are as follows:
- Downsizing and repaying your loan, as per your downsizing agreement.
- Porting your lifetime mortgage plan to a new property, as long as it’s approved by your lender.
- Settling your loan completely, although there could be early repayment charges linked to this option.
The Inheritance protection guarantee is a tool for protecting a portion of your property value which can be distributed to your beneficiaries once you have passed away.
This will impact the amount of equity you’re eligible to unlock.
No Negative Equity Guarantee
The no negative equity guarantee was implemented by the Equity Release Council to prevent equity release debt from reaching a deficit.
Now, you or your heirs will never owe more than the final sale value of your property, with additional debt written off.
Equity release can help reduce the amount of inheritance tax that your loved ones will pay after you’re deceased.
Disadvantages of a Lifetime Mortgage
The disadvantages of lifetime mortgages include that the interest will compound, reducing your family’s inheritance.
Here’s further information.
The Interest Can Build Up Quickly
The interest owed on your lifetime mortgage can build up quickly if you don’t opt for monthly repayments.
There’s a possibility that the loan could cost your family your entire property value.
Your beneficiaries will receive a reduced inheritance.
Since you’ll be using the cash tied into your property instead of leaving it intact and listed in your will.
Early Repayment Charge
Early repayment charges can be expected if you opt to terminate your lifetime mortgage loan agreement.
While the amount may differ, depending on the length of your loan, you can expect to pay somewhere between 3% and 5% of the total loan amount.
Means-Tested State Benefits
Unlocking the equity from your home may affect your eligibility for means-tested benefits.
The reason for this is because means-test benefits are based on your financial standing, which will increase once you’ve received your lifetime mortgage loan amount.
Higher Interest Rates
Lifetime mortgage interest rates are higher than that of a traditional mortgage.
While rates dipped in March 2022, they have since risen, with the average customer qualifying for a fixed rate of 4.5% AER.
Repaying an Existing Mortgage
You will need to repay any existing mortgage on the property from which you release equity.
The outstanding loan amount can be settled with some of the equity you access through a lifetime mortgage product.
You may have problems moving once you’ve signed onto a lifetime mortgage loan.
Any potential new property will need to be approved by your lender if you wish to port your loan.
Types of Lifetime Mortgages
The types of lifetime mortgages available in 2022 are:
- Lum-sum lifetime mortgages
- Drawdown lifetime mortgages
- Income lifetime mortgages
- Interest repayments
- Enhanced Lifetime mortgages
- Role up lifetime mortgages
- Flexible lifetime mortgages
The Equity Release Council made an unprecedented announcement stating that as of 31 March 2022, all lifetime mortgage providers must give customers the option of voluntary loan and interest repayments.
This has shifted the equity release landscape.
Let’s take a more detailed look at the equity release product types and flexability available in 2022.
Lum-Sum Lifetime Mortgage
A lump-sum lifetime mortgage is designed for you to withdraw a large cash injection; generally a minimum of £10,000 or £20,000.
This is ideal if you’re looking to fund a once-off big-ticket item.
Drawdown Lifetime Mortgage
A drawdown lifetime mortgage is the most popular retirement mortgage product in the UK.
Once you’ve opted for a smaller lump sum, the balance is safely placed in a cash facility that you can access whenever you wish.
There’ll be a minimum withdrawal value, typically around £5,000.
Fortunately, you’re only charged with interest on the cash you withdraw from the facility.
Income Lifetime Mortgage
An income lifetime mortgage is designed to provide borrowers with a monthly stipend, emulating a traditional salary.
The equity available in the property (between 20% and 60% of the total valuation) is equally distributed each month, spanning up to 25 years.
You can opt for monthly interest repayments on your drawdown or lump sum plan.
By doing so, you’re stopping the interest from compounding and, in turn, reducing the overall cost of the loan.
Enhanced Lifetime Mortgage
An enhanced lifetime mortgage, also known as an impaired plan, will consider your health condition when calculating your achievable loan-to-value ratio and interest rates.
If you suffer from a lifestyle condition or illness, you may qualify for low interest rates and a greater LTV.
Roll-up Lifetime Mortgage
The roll-up lifetime mortgage is your typical lump sum or drawdown plan where you allow the interest to accrue until the end of the loan term.
This is the most expensive lifetime mortgage option, as you’ll be paying interest on interest.
Flexible Lifetime Mortgage
Flexible lifetime mortgages are the future of equity release, with all new products providing customers with the opportunity to stop and start payments whenever they wish.
Now you can repay your lifetime mortgage within a few years, with no penalties attached.
What’s more, there’s zero risk of foreclosure.
What Are the Costs Involved in Getting a Lifetime Mortgage?
The costs involved in getting a lifetime mortgage include application fees, completion fees, legal costs, property valuation costs, advice fees, and compound interest.
Some lenders may wave certain costs or include them in one package.
Got Questions? Check These First
Is a Lifetime Mortgage Right for You?
You’ll know if a lifetime mortgage is right for you once you’ve considered all your alternatives and discussed your options with a financial advisor.
How Much Is a Lifetime Mortgage?
A lifetime mortgage costs between £1,500 and £3,000, plus compound interest.
How Much Can You Borrow With a Lifetime Mortgage?
You can usually borrow between 20% and 60% of your total property value with a lifetime mortgage.
So, if your property is valued at £200,000, you could receive a minimum of £40,000 in tax-free cash.
How Long Does It Take To Get a Lifetime Mortgage?
It will take between 4 and 8 weeks to arrange a lifetime mortgage, with a maximum of 12 weeks for more complicated cases.
What’s the Most Popular Type of Lifetime Mortgage?
The most popular type of lifetime mortgage is a drawdown lifetime mortgage, with 59% of customers selecting this option.
What Can You Use a Lifetime Mortgage For?
You can use your lifetime mortgage in any way you wish, including purchasing a dream car or simply covering your living expenses.
Can You Pay Off a Lifetime Mortgage?
Yes, you can pay off a lifetime mortgage.
You can volunteer to repay the monthly interest and an annual portion of the loan.
Can I Sell My House With a Lifetime Mortgage?
Yes, you can sell your house with a lifetime mortgage, but you may incur early repayment charges.
Lifetime mortgages continue to rise in popularity, as product flexibility forges ahead at an exciting pace.
If you’re considering a lifetime mortgage, your best is to contact a whole of market financial advisor who specialises in equity release.
Perhaps a lifetime mortgage is the key to your financial dreams?