A lifetime mortgage is a type of equity release product. It allows you to release money from the value of your home without having to sell it or move out, and doesn’t need to be paid back until your home is sold.
Property prices have soared since the 1990s, leading many of us to take on large mortgages. And because we’ve used a significant percentage of our income to pay them off, the money we might have otherwise used to build a healthy retirement pot has been diverted into a property instead.
During this time your property asset may have grown significantly in value – but that money is usually inaccessible unless you downsize. For those who don’t want to move, but need to find additional funds in retirement, lifetime mortgages might be an option.
A lifetime mortgage allows you to stay living in your own home without having to make regular mortgage payments
Is a lifetime mortgage the same as equity release?
A lifetime mortgage is one of the most common forms of equity release, with the other being a home reversion plan. Both could be used to provide you with a retirement income or pay towards care home costs if you need the additional money.
A home reversion plan is when you sell all or part of your home for a sum less than market value. In exchange, you’ll receive a lump sum or regular guaranteed payments, and you can stay living in your home rent-free until you die.
In contrast, a lifetime mortgage is like taking out a loan at an agreed interest rate that gives you a lump sum or regular payments.
To find out more about equity release, see The Pros and Cons of Equity Release
How does a lifetime mortgage work?
A lifetime mortgage allows you to stay living in your own home without having to make regular mortgage payments. The mortgage loan and the interest accrued are repaid when the property is sold, usually when you die or move into long-term care.
There is a chance that you could end up owing more than the property is worth if house prices don’t rise (or worse, fall)
What are the different types of lifetime mortgages?
There are two main types of lifetime mortgages: an interest roll-up mortgage and an interest-paying mortgage.
Interest roll-up mortgage
With an interest roll-up mortgage, interest will continue to accrue on the amount you borrow, which is added to the loan and paid in full when the house is sold.
One thing to remember is that the interest on the original loan will build up, which means that you’ll be paying interest on the interest itself – a process known as ‘compounding’. This compounding makes roll-up mortgages more expensive than a standard mortgage, and it’s important to understand the implications. However, many roll-up mortgages are a fixed rate for life, so you’ll know from the outset how much that debt might grow, over a given timeframe.
There is a chance that you could end up owing more than the property is worth if house prices don’t rise (or worse, fall). Many providers offer a ‘no-negative-equity-guarantee’ to ensure you never end up owing more than the value of your property when it’s sold.
Interest-paying mortgage
To avoid the compound effect, you can take out an interest-paying mortgage. You’ll still receive a lump sum or regular income payments, but instead of the interest being added to the loan, you’ll make regular payments to pay it off. This means the amount left on the outstanding loan will be much smaller when the property is sold and you will pay far less in the long term.
However, because you will still need to pay those regular payments to cover the interest, you may decide that this approach largely defeats the purpose of using equity release in the first place.
What happens if I die when I have a lifetime mortgage?
When you die, your lifetime mortgage is usually repaid through the sale of your home. If the mortgage is in your name only, your executors have up to 12 months to sell your home and repay the loan after your death. If you have a joint plan with a partner, the loan repayment is only due when the last homeowner on the deeds dies or enters permanent long-term care.
Once the loan and any other fees have been paid off, the remaining proceeds will be distributed to your beneficiaries in accordance with your will.
Can I move house or rent out my home?
You can still move home with a lifetime mortgage as long as you’re moving to a property that your lender classes as a ‘suitable alternative property’. Properties in retirement complexes are not usually regarded as suitable as there are often restrictions that prevent them from being sold on the open market.
You wouldn’t be able to rent out your entire property; a lifetime mortgage is not a buy-to-let mortgage. However, you would be able to rent a room within your property as long as you gain the mortgage lender’s permission first.
Amber River Financial Planning
You should always seek advice from an independent financial adviser before taking out a lifetime mortgage or any other form of equity release. They will crunch the numbers to consider all possible options for you to ensure your interests are protected.
Get in touch
To speak to one of our team about whether equity release is right for you, or to arrange an appointment, call 0800 915 0000, or alternatively use our contact form here.
Disclaimer:
The information within this article was correct at the time of publishing, but laws and tax rules are subject to change. Your circumstances and where you live in the UK also have an impact on tax treatment.
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