A Complete Guide to Lifetime Mortgages
I think you’ll agree with me when I say…
It’s challenging trying to wrap your mind around lifetime mortgage plans, 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 how lifetime mortgages work, the various types of lifetime mortgages, the benefits of taking out one of the plans, and the dues associated with these plans.
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What is a Lifetime Mortgage Plan?
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 a lifetime mortgage plan comes in handy. It is the most popular equity release scheme and works by allowing homeowners over 55 years of age to acquire the value or ‘equity,’ tied up in their estate as a cash disbursement. It enables you to have access to tax-free 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 the rest of your life. You continue to reside in your property rent-free until you die or move into permanent care. It’s the ideal alternative to downsizing or if you don’t want to move.
How Does a Lifetime Mortgage Plan Work?
True to its name, a lifetime mortgage operates by running for the rest of the life of the homeowner. Unconventionally, no repayments are made on the plan till the last surviving homeowner dies or you move into permanent care. That said, most lifetime mortgage plans today offer you the option of making monthly payments or voluntary payments to regulate the interest from accruing.
The interest typically builds up or ‘rolls up’ on a lifetime mortgage, thus accumulating with time. Anything left after repaying the lifetime mortgage 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 tax-free, and you get charge interest on the amount you withdraw.
How Much Cash Can You Unlock with a Lifetime Mortgage?
The amount you can borrow is all dependent on your lender.
However, most plan providers use the following criteria:
- The youngest homeowner has to be a minimum age of 55
- The minimum value of your property needs to be £70,000
- The homeowner’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 the exact amount of money you can unlock, you can use our free equity release calculator to see the amount you can release and chat with an expert for free.
The Cost of Lifetime Mortgages
Like other equity release plans, 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 your plan
- An arrangement fee to the plan provider
- The solicitor’s fees
- Property valuation fees
- The completion fee – you can pay at the point of completion or add it up to your mortgage
As per most equity release companies, this expense can add to about £1,500-£3,500. You might also have to pay extra if you decide to make ‘early repayment 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.
Read Our Full Article » Lifetime Mortgage Rates
Types of Lifetime Mortgages
Seven out of ten equity release consumers choose lifetime mortgage plans. It is because of the flexible add-on elements these plans factor in.
Typically, lifetime mortgage products feature the basic roll-up plan, which involves taking out a lump sum of tax-free equity, and you don’t make any monthly repayment. The resulting balance builds up (compounds) over time, but then again can be offset by the possibly accumulating value of your estate.
There are several lifetime mortgage plans, 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 lifetime mortgage, this option is dependent on your health and lifestyle.
This type of plan, if you qualify, allows you to borrow more money and at a lower interest rates. In both cases, your plan provider uses the life expectancy rate to calculate the maximum amount of equity you can release and what amount of the lower interest rates you will pay in the long-run.
Read Our Article » Enhanced Lifetime Mortgage
2. Voluntary Payment Plans
It is a new market innovation and allows for ad-hoc repayments to the loan amount. It enables you to make payments of up to 15% of the initial amount you unlock every year with no penalties.
Read Our Article » Voluntary Repayment Lifetime Mortgage
3. Interest-Only Lifetime Mortgages
Monthly repayments reversed the workings of unconventional equity release plans. With interest-only lifetime mortgage, however, you get to repay the interest and sustain a level balance.
Read Our Article » Interest Only Lifetime Mortgage
4. Drawdown Lifetime Mortgaes
A drawdown lifetime mortgage offers you a cash reserve from which you are free to take cash withdrawals as and when you need to.
It means that you have access to cash but are only charged interest 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.
To get more information on these, make sure you read through the guide on ‘Types of Lifetime Mortgages’.
Read Our Full Article » Drawdown Lifetime Mortgage
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 plan provider more than the value of your property despite the amount you like to unlock.
- You get to live in your home rent-free. You also have the freedom to move to another home, if the new house meets the conditions stipulated out by your provider – your lifetime mortgage will move with you.
- You get the financial freedom to use the tax-free capital you unlock 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 tax-free, 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 provider.
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 plan provider, 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 criteria of your plan provider.
- 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 scheme 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 out a lifetime mortgage plan, and these comprise of:
- It can affect your tax position and means-tested benefits.
- It will affect the amount that you hand in as an inheritance.
- When you have an interest roll-up mortgage, the total amount you owe is a lot higher until it is not paid.
- Taking out a mortgage with variable interest rates might cost you more in the long-run. However, with the ERC standards, if the interest is, then your plan provider must incorporate the upper-limit ‘cap.’
- Your plan providers will also expect you to keep your estate.
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 a lifetime mortgage plan, and here are the key variances:
|Lifetime Mortgage||Residential Mortgage|
|Monthly Payments||Typically, you do not pay any monthly payments: but there are specific plans that can allow you to do this||You make monthly 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 into permanent care||It has a fixed period – the mortgage or loan term|
|Interest Charges||It adds up to the amount you owe every month – the ‘compound interest’ or ‘roll-up’ interest||Your provider will bill you through either the: Interest-only mortgage – the monthly costs cover the interest charged on the initial amount you borrowed. That amount is repaid by other means at the end of the term Repayment mortgage – the monthly expense consist of the interest charged and a ration of the initial amount you borrow|
|Interest Rates||There are preset interest rates throughout the lifetime mortgage scheme||You can opt to have the variable or fixed interest rates, with a variety of choices to pick from|
|Affordability Checks||It depends on your plan provider, 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 expert. It would be best if you also involved your family to assure you make the best decision.
Read Our Article » Income Lifetime Mortgage
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 expert for free.
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.