How Does a Lifetime Mortgage Work?

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How Does a Lifetime Mortgage Work?

The Difference Between Lifetime Mortgages and Equity Release

Types of Lifetime Mortgage

How is a lifetime mortgage repaid?

What are the pros and cons of a lifetime mortgage?

A lifetime mortgage is a type of equity release product that is available to homeowners over the age of 55. With a lifetime mortgage, you can release tax-free cash from the equity in your home while still retaining ownership of your property.

The amount of cash you can release will be dependent on your age and the value of your property. The loan is typically repaid when you die or move into long-term care. The amount owed increases over time due to the interest charged, though many will let this interest roll up.

There are no monthly capital payments to make, with the loan being repaid from the sale of your property when it is eventually sold. You do not need to have previously had a mortgage to access this type of mortgage either.

It’s important to note that taking out a lifetime mortgage can reduce the amount of inheritance you leave behind, and may affect your eligibility for means-tested benefits, especially if you choose not to pay back the interest.

The Difference Between Lifetime Mortgages and Equity Release

A lifetime mortgage is a type of equity release product that allows eligible homeowners to borrow money against the value of their property.

Equity release, on the other hand, is a broader term that includes other types of equity release products, with a lifetime mortgage being one of those products.

Another type of equity release, for example, is a home reversion plan, where the homeowners sells a share in their property to a provider, in exchange for a lump sum.

No matter whether you are looking to take out a lifetime mortgage, a home reversion plan or one of the various interest only mortgage alternatives, such as a retirement interest only mortgage, it is always highly recommended that you seek the expert advice of a qualified mortgage advisor first.

Types of Lifetime Mortgage

A lifetime mortgage will most likely be found in one of two different forms. The first of these is a lump sum lifetime mortgage, with the second one being a drawdown lifetime mortgage.

A lump sum lifetime mortgage works as the name would initially suggest, allowing you to release funds all in one go, as a lump sum payment. This gives you the choice to release as much as you need, exactly when you need it, though you will end up with a much bigger loan.

A drawdown lifetime mortgage gives you the option of releasing funds as and when you need it, meaning you won’t have everything coming out all at once. You only pay interest on what is released, so if you don’t need it all in one go, this could be a better option.

When you look at taking out either of these lifetime mortgages, there will be the option for you to be able to let the interest roll-up, though this will affect the amount of inheritance that is left behind, once the sale is completed and your loan has been repaid to the mortgage lender.

The great news for applicants, is that not only will a mortgage advisor be able to help with ring-fencing a portion of your equity during the initial stages, allowing you to save some for inheritance, but thanks to our Equity Release Council membership, we can offer a “No Negative Equity Guarantee”.

Having this guarantee in place will mean that even if your debt goes up, your estate will never have to owe anymore than what the property is worth. Essentially, when the property is sold, the funds go to the mortgage lender and any excess debt is simply let go.

This allows you to rest easy, knowing your family aren’t to be left behind with any potential financial burdens.

How is a lifetime mortgage repaid?

Once your lifetime mortgage has ended, either when you have died or moved into long-term care, the amount that you borrowed from the mortgage lender will be paid back from the sale of your home. Over time you will have likely accrued interest, if you opted not to pay it, which is also added to the final total.

It is the responsibility of your beneficiaries or executors of the estate to initiate the sale of the property, in order to repay the mortgage lender. There is typically a 12 month period, of which they give you to do this.

If you have not sold the property within that time frame, the mortgage lender will step in to start the sale. Many of them will take into account current market conditions, as it is not always viable to sell the property within that period. So long as it is a fair market price, they’ll generally be lenient.

What are the pros and cons of a lifetime mortgage?

A lifetime mortgage is a type of equity release product that can provide a lump sum or regular income in exchange for a portion of the value of your home. As with any type of financial product, there are advantages and disadvantages to consider before you make a decision.

One significant advantage of a lifetime mortgage is that it allows you to access the equity tied up in your home without having to sell it. This means you can continue to live in your home while also enjoying the benefits of the equity release.

Additionally, with a lifetime mortgage, you do not need to make any monthly repayments. The interest charged on the amount borrowed is added to the outstanding balance, which is then repaid when the property is sold, usually after the borrower dies or moves into long-term care.

That being said, there are also some disadvantages to consider. One is that the amount you can borrow is dependent on the value of your property, your age, and your health. If your health deteriorates, or if your property decreases in value, you may not be able to borrow as much as you had hoped.

Additionally, because interest is charged on the amount that is borrowed, the total amount owed can grow rapidly over time. This can reduce the amount of inheritance that you are able to leave behind for your loved ones.

Another consideration is that taking out a lifetime mortgage can impact your entitlement to state benefits, such as pension credit or council tax reduction. It’s important to speak with a specialist advisor who can help you understand how a lifetime mortgage could affect your individual circumstances.

Overall, a lifetime mortgage can be a viable option for those looking to access the equity tied up in their home, but it’s important to carefully consider the pros and cons and seek professional advice before making a decision.

Speak to a Lifetime Mortgage Advisor Today

We offer a free appointment with a specialist lifetime mortgage advisor, to all who get in touch with us regarding equity release and lifetime mortgages. During this appointment, you can discuss your individual circumstances and find out whether a lifetime mortgage could be a suitable option for you.

Your dedicated mortgage advisor will explain all the advantages and disadvantages of a lifetime mortgage, answer any questions you may have, and guide you through the application process if you decide to proceed. Your family is always encouraged to be a part of the conversation.

Book your free mortgage appointment today and we’ll see if equity release by way of a lifetime mortgage or perhaps an alternative such as retirement interest only mortgages to name one of many, is the right route for you to take.