A lifetime mortgage
is a long-term product that enables borrowers to release equity from their home while still retaining ownership.
While the amount you can borrow with a lifetime mortgage varies based on your age and the value of your property, with all these types of loans, you won’t have to make any repayments until you die, go into long-term care or sell your property.
Interest is charged on what you borrow, and can either be repaid or added to the total loan amount. Once you die or move into permanent care, the money from the sale of the property is used to pay off the loan, with any money left over passing on to your heirs.
When taking out this type of loan, you can choose to either borrow a lump sum, or instead opt for a lower amount with the option of a drawdown facility. The drawdown facility suits those who might want to take out regular or ad-hoc small amounts rather than one larger loan, as it means borrowers will only need to pay interest on the money they need.
If you are worried about the inheritance for your family, you can choose to protect some of the value of your property when opting for a lifetime mortgage.
Essentially, a lifetime mortgage is a type of equity release stream that can provide an income and free up some of the wealth tied up in your home while you continue to live there.
What are the different types of lifetime mortgages?
There are two different types of lifetime mortgages, each with different costs.
Interest roll-up mortgage
With an interest roll-up mortgage, you either get a lump sum or are paid a regular amount. On this, you are charged interest which is added to the loan.
With this type of mortgage, you don’t need to make any regular payments. Instead, the amount you borrow, including the rolled-up interest, is paid once your home is sold, at the end of the mortgage term.
Things to look out for:
Andrew Johnson, money expert at the Money Advice Service, says: ‘The amount you owe can grow very quickly so choose a scheme with no-negative-equity-guarantees, so what you owe will never exceed the value of your property.’
With an interest-paying mortgage, you are paid a lump sum, and can make either monthly or ad-hoc payments, which reduces or stops the impact of the interest building up.
You can also pay off the capital of your home with some mortgage schemes. The amount you borrow is paid once your home is sold, at the end of the mortgage term.
Things to look out for:
‘A rise in interest rates could significantly impact your repayments so consider a fixed rate scheme or one with an ‘interest rate cap’,’ says Johnson.
‘Missing monthly payments could mean that the mortgage is automatically switched to a roll-up mortgage or repossession. An independent financial adviser will help explain your options.’
Are there any potential negative sides to a lifetime mortgage?
According to Johnson, there are a number of risks to consider when thinking about whether a lifetime mortgage is suitable for you.
‘With an interest roll-up mortgage, the total amount you owe can grow quickly,’ he says. ‘Eventually this might mean that you owe more than the value of your home, unless your mortgage has a no-negative-equity-guarantee. Make sure your mortgage includes this guarantee.
‘It is also worth thinking about whether a mortgage with a variable interest rate suits you as the interest rate could rise significantly.’
Johnson warns that it’s also important to consider the impact on your inheritance when considering a lifetime mortgage.
‘You should also think about what you whether you want to leave your house to your children as an inheritance as well as your tax position and entitlement to means-tested benefits,’ he says.
It’s also worth considering all the options before taking out a lifetime mortgage. As this type of product is a long-term commitment, deciding to repay the loan early could incur heavy early repayment charges.
It may be worth talking to a mortgage broker so they can source the best mortgage for you, and explain the small print before you decide to go ahead. Although they can be costly initially, having an adviser on hand could help you save time and money in the long term. They may suggest products you haven’t considered previously that might be better suited to your particular circumstances.
Lastly, as you still own your home, lenders will also expect you to keep your home in good condition within the framework of reasonable maintenance. You may need to put some money aside to keep you home in good condition. If this could be problematic, a lifetime mortgage may not be for you.
Are there any hidden costs?
As with all mortgage products, before going ahead, it’s important to consider the extra costs that you may be charged.
These could include an arrangement fee to the lender, a broker’s fee, legal fees, valuation fees, an adviser’s costs, buildings insurance or a completion fee.
Make sure you’ve factored in all these extras before choosing your lifetime mortgage product to avoid any surprises down the line.