If you’ve lived in your home for a long period and paid a substantial sum of the mortgage, you could be close to total home ownership. However, this can be expensive, and it can take financial sacrifice to reach this stage.
However, there are some options available to help you benefit from the money tied up in your house and remain living there. A lifetime mortgage, for example, means you can take advantage of a cash injection, providing a significant increase in the flexibility of your finances.
At this stage, it’s important to note that this shouldn’t be classed as free money. In this blog, we explain how a lifetime mortgage works and how best to benefit from this.
What is a lifetime mortgage?
A lifetime mortgage is a form of equity release loan made available to homeowners aged 55 or over. It allows you to access tax-free cash tied up in the home via a loan paid back upon death or a move into care.
Whilst borrowing the cash, you remain eligible to live in the property and are still expected to maintain it as you would otherwise. The money can be paid to you in one lump sum, or in monthly instalments if preferable. You also have the choice to make monthly payments to cover the interest over the duration of the mortgage agreement. This will reduce the amount owed when the house is sold, and the mortgage cleared.
The loan is paid off upon the sale of the property, but you are allowed to ring-fence some of the property value as part of the inheritance you plan to pass on. If the mortgage can be paid off without selling the home, the property can be passed on to a beneficiary. If the property sale does not cover the loan amount, the beneficiaries will have to settle the debt with other parts of your estate or their own funds.
It should be noted that a lifetime mortgage can only be an option for a property classed as your main residence.
How much can be borrowed for a lifetime mortgage?
You cannot borrow more than the property is worth, and can only borrow a specific percentage of the property’s value. Over time, this amount changes – generally speaking, the younger you are, the smaller the amount you can borrow. In some cases, this means 25% of the total home value. Once you reach 70-80 years of age, this amount can increase to 60% or more. Some lenders also have a cap on the value and may only allow you to release up to £100,000 of the equity held within the property.
When you speak to a broker or a lifetime mortgage provider, we recommend enquiring about the amount you are eligible to borrow and the rates attached to it as soon as possible. You could be offered a value that matches your aspirations, but the interest rate could hinder the inheritance of your loved ones.
Are there different types of lifetime mortgages?
Yes – there are two options you can choose from, both of which offer their own benefits and disadvantages.
The interest paying lifetime mortgage
With this lifetime mortgage, you’ll receive a lump sum and make monthly payments. This stops your interest compounding, resulting in a saving overall, but is often only suited to those who have the disposable income to make monthly payments towards it. Some lenders will allow you to pay some of the loan value back too, but this should be checked upon application. The final balance is paid when the property is sold.
The interest roll-up lifetime mortgage
With this form of lifetime mortgage, you’ll receive a lump sum or regular payments with interest charged on them (which is added to the loan value). You won’t need to make regular payments, and the grand total of the loan and interest is paid when the home is sold. Compound interest could be of concern at this stage, as you will be paying interest on interest over the course of the loan. That being said, with no monthly payments to make, this is still often the preferred choice for those unable to afford monthly payments.
What happens to the existing mortgage when you have a lifetime mortgage?
If you still owe money on your home, the lifetime mortgage will first be used to pay off the outstanding mortgage balance. Anything left over is yours to do with as you wish.
Depending on what the amount is, you could have multiple options available such as financing your retirement, aiding your family with their financial obligations, or renovating your home to increase its value, further helping your beneficiaries in the future.
Who can apply for a lifetime mortgage?
To be eligible for a lifetime mortgage, you must fulfil a few criteria. Below, we’ve listed the most common, although some lenders may add other specifics to their eligibility criteria:
- You must be aged 55 or over
- The lifetime mortgage is for your main residence
- The property is in England, Scotland or Wales
- You are the homeowner
- Your home must meet a minimum value as set out by the lender
How much will it cost to get a lifetime mortgage?
Costs for a lifetime mortgage vary, but an equity release broker will be able to help you find a lifetime mortgage that has less cost and more reward. You should factor in any planning that you are likely to accrue costs for, such as:
- Legal fees
- Buildings insurance
- Arrangement fees
- A completion fee
In addition, you may also face early repayment charges for clearing your existing mortgage early. There may also be similar fees for this lifetime mortgage if you decide to pay it off early. This could mean that along with the £1,000-£3,000 fees you might expect to pay initially, there could be several thousand pounds more in addition.
Can you pay a lifetime mortgage back early?
Some lenders have specific terms in place that allow you to pay back a specific percentage of the amount borrowed each year. This amount covers the loan value and not any interest gained. Many lenders cap this amount at 10%, and if you were to pay more, an early repayment could apply. Sticking to the 10% limit means you could save substantial interest as there is less of it to compound.
What happens if the amount owed is more than the home is worth?
Unfortunately, the debt would need to be repaid, unless the lifetime mortgage was taken out with a no-equity guarantee. This would mean that when the house is sold upon your passing, your beneficiaries won’t have to pay more than the house is worth. With interest mounting on roll-up interest lifetime mortgages, it can become easy to owe back more than the property is worth, so it is worth considering this when looking at lifetime mortgages. The no equity guarantee is only available in specific cases though. You’d need to find a mortgage advisor like Mortgage Saving Experts who sign up to the Equity Releases Councils conduct of business and codes or practice. This way you can remain confident that negative equity won’t be a concern for your beneficiaries in the future.
A lifetime mortgage can be a great way to help assist your family members or even yourself, but it should be given great thought prior to committing. That is why Mortgage Saving Experts are on hand to help. Our impartial position allows us to provide open and transparent advice and guidance on the product most suited to your needs and affordability. Why not contact our expert team today to find out more and see how we can help you transform the lives of you or your family members?
