A Complete Guide
I think you’ll agree with me when I say…
It’s challenging trying to wrap your mind around lifetime mortgage, especially with the limited research options and expense that come with consulting professional advice.
Or is it?
Well, by checking out this guide, you will get unbiased information on these work, the various types of lifetime mortgages, the benefits of taking one out, and the dues associated.
What are Lifetime Mortgage Plans?
If you’re property rich but cash strapped, then you will appreciate how crucial it is to have the money in place to enjoy your financial freedom and not to get worried about how you will pay for your bills, insurance premiums and to relish your retirement.
However, if you do not have a considerable pension pot or any savings, getting to realise your dreams and retain your lifestyle after retirement could be easier said than done.
That is where lifetime mortgage comes in handy. It is the most popular equity release scheme and works by allowing homeowners over 55 years to acquire the value or ‘equity,’ tied up in their estate as a cash disbursement. It enables you to have access to no tax cash to enjoy in retirement – while letting you keep ownership of your home.
Unlike the residential mortgages which is on a fixed rate, lifetime mortgages run for life. You continue to reside in your property with no rent until you die. It’s the ideal alternative to downsizing.
How Does This Work?
True to its name, a lifetime mortgage works by running for life of the owner. Unconventionally, no paying are made till the last surviving owner dies. That said, most of them today offer you the option of making mensual paying or voluntary paying to regulate the usury from accruing.
The interest typically builds up or ‘rolls up’ on this, thus accumulating with time. Anything left after repaying the provider goes to your beneficiaries.
The funds you receive with lifetime mortgages are also flexible. You can choose to take the money as a lump sum or in several smaller chunks, ‘drawdown.’ In both cases, the cash you release is of no tax, and you get charge usury on your withdrawal.
How Much Cash Can You Unlock?
What you can borrow is all dependent on your lender.
However, most use the following criteria:
- The youngest owner has to be a minimum 55
- The minimum value of your property needs to be £70,000
- The owner’s health and lifestyle – if you have any qualifying medical issues. You have the right to borrow more cash.
So, to give a rough estimate, according to Aviva and Legal & General, you can release between 20% and 50% of the equity in your residence.
However, when it comes to deciding how much you can use, you can use our calculator to see how much you can release and chat with an advicer.
Like other equity release, you always have to make sure you are aware of the expenses involved, which can include:
- The financial adviser’s fee – for helping you set up
- An arrangement fee to the provider
- The solicitor’s fees
- Property valuation fees
- The completion fee – you can pay at the point of completion
As per most equity release companies, this expense can up about £1,500-£3,500. You might also have to pay extra if you decide to make ‘early payment charges.’
Therefore, before you take out a lifetime mortgage, be sure that you understand the dues you will have to cover and get the right advice from your adviser.
Classifications of Lifetime Mortgages
Seven out of ten equity release consumers choose lifetime mortgage. It is because of the flexible add-on elements these options factor in.
Typically, these products feature the basic roll-up plan, which involves taking out a lump sum of no tax equity, and you don’t make any mensual payment. The resulting balance builds up (compounds) over time, but then again can be offset by the possibly accumulating value.
There are several, all which provide you with a range of features that are designed to meet your needs:
1. Enhanced Lifetime Mortgages
Very similar to the standard one, this option is dependent on your health and lifestyle.
This type, if you qualify, allows you to borrow more money and at a lower usury remuneration. In both cases, your provider uses the life expectancy rate to calculate the maximum equity you can release and the lower interest remuneration you will pay in the long-run.
2. Voluntary Payment Plans
It is a new market innovation and allows for ad-hoc paying to the loan. It enables you to make paying of up to 15% of the initial amount every year with no penalties.
3. Interest-Only Lifetime Mortgages
Monthly paying reversed the workings of unconventional equity release. With this, however, you get to repay the usury and sustain a level balance.
4. Drawdown Lifetime Mortgaes
It offers you a cash reserve from which you can take cash withdrawals as and when you need to.
It means that you have access to cash but are only charged usury on the money when you use it. Think of it a bit like an overdraft facility. It is available if you need it, and you only pay if you use it. If you’re looking to take several withdrawal, this might be an excellent option for you.
The Benefits of a Lifetime Mortgage
The popularity of lifetime mortgages is increasing every year, and it is due to its incredible benefits. They comprise:
- It helps you control your debt. With the ‘no negative guarantee,’ you will never owe your provider more than the value of your property despite how much you like.
- You get to live in your home with no rent. You may go to another home, if the new house meets the conditions stipulated out by your broker – your lifetime mortgage will go with you.
- You get the financial freedom to use the no tax capital as you please.
- You have the options, and you can select the one that suits you best. You can opt to release as little as £10,000 with no tax, with more in the reserve facility for future purposes. You can also get to select either the fixed lifetime mortgage rate option depending on the broker.
Is it Secure?
Since 2002, lifetime mortgages have been regulated by the FCA (Financial Conduct Authority). So you can rest easy knowing that there are significant stipulations and guidelines to ensure that you’ll get a fair deal.
The industry body also protects your broker, financial adviser, and surveyors, through the Equity Release Council – whose members must heed to the Council’s Statement of Principles which comprise of:
- You have the right to continue living in your home till you die or decide to move into long-term care.
- You have the right to move to another home, if it is a suitable alternative property that meets the lending of your broker.
- In case you want to the assurance that your family will inherit a part of your property, you have the right to take inheritance protection that lets you ring-fence some of the value of your residence give to your family.
- You are protected by the ‘no-negative guarantee’ that safeguards your heirs from owing more than the value of your estate.
Pitfalls of Lifetime Mortgages
There are various factors that one needs to consider when taking this out, and these comprise of:
- It can affect your tax position and means-tested benefits.
- It will affect the inheritance.
- When you have an usury roll-up mortgage, you will owe a lot higher until it is not paid.
- Taking out a mortgage with variable usury remuneration might cost you more in the long-run. However, with the ERC standards, if the usury is, then your broker must incorporate the upper-limit ‘cap.’
Limited Mortgages vs. Residential Mortgages
You might have purchased your home with a traditional mortgage. However, as you may have noticed, it is different from lifetime mortgage, and here are the key variances:
|Lifetime Mortgage||Residential Mortgage|
|Monthly Payments||Typically, you do not pay any mensual payments: but there are specific plans that can allow you to do this||You make mensual payments till the end of the mortgage duration|
|Terms of the Loan||There is no fixed duration. You only pay when you pass away or move to permanent care||It has a fixed period – the mortgage or loan term|
|Interest Charges||It adds up to what you owe every month – the ‘compound interest’ or ‘roll-up’ interest||Your broker will bill you through either the: Interest-only mortgage – the mensual costs cover the usury on the initial amount you borrowed. This is repaid by other means at the end of the term Repayment mortgage – the mensual expense consist of the usury charged and a ration of the initial amount you borrow|
|Interest Remuneration||There are preset usury remuneration throughout the scheme||You can opt to have the variable or fixed usury remuneration, with a variety of choices to pick from|
|Affordability Checks||It depends on your plan broker, but in most cases, there are no affordability checks if you choose to make no month-to-month payments||Your income and credit score are considered to confirm that you afford your monthly mortgage payments|
Taking out a lifetime mortgage is a life-changing, and it might not be the best option for everyone. You need to consider all your options carefully and seek specialist advice from your financial advicer. It would be best if you also involved your family to assure you make the best decision.
In case you need more information on this though, be sure to click here and see how much equity you can release and chat with an adviser.
How much money could you release?
A lifetime mortgage plan allows you to access the value of your home, tax-free without having to sell up, so that you can have money to spend on whatever you want or need.