What is a lifetime mortgage?
You might find that later in life you are asset-rich in owning your home, but you don’t have any savings to spend or disposable income having spent so many years paying into your hard-earned wages into your mortgage.
A lifetime mortgage offers a solution. Differing to a standard residential mortgage, a lifetime mortgage is an interest-only loan taken out against the purchase of a property. No repayments are required for a lifetime mortgage, as the loan is typically repaid when the house is sold.
Lifetime mortgages are essentially a type of Equity Release plan that allows you to use some of the equity that has built up in your home, allowing you to remain living in your property.
Lifetime mortgages lend you the cash to do anything you choose – provide additional retirement income, or go on that dream holiday.
The minimum to take out a lifetime mortgage is usually 55.
How does a lifetime mortgage work?
If you hold a lifetime mortgage, you own the house whilst you’re alive, as with a residential mortgage. If you go into long-term care or pass away, the property will be sold, with the proceeds used to settle the mortgage.
Interest rates for lifetime mortgages are typically higher than those associated with standard mortgages, which should be taken into consideration when you are choosing a mortgage type.
If you wish to downsize to a smaller property, you could be faced with too little equity in your home to you allow to purchase another.
You should also consider that the structure of a lifetime mortgage may leave very little or nothing at all in your estate to pass to your beneficiaries.
Which types of lifetime mortgage are available?
There are three types of lifetime mortgage to choose from:
- Roll-up lifetime mortgage – interest is added to the loan and you don’t make any regular payments. Compound interest can erode the value of your estate, so this should be considered
- Fixed-repayment lifetime mortgages – you are able to access a lump sum payment and, rather than paying interest, the amount to be repaid will be agreed in advance. The repayment amount will be significantly larger than the original lump sum
- Interest-only lifetime mortgage – similar to a roll-up lifetime mortgage, with the interest payable on a monthly basis, rather than compound. The amount to pay
Interest-only mortgages are not suitable for those with no income. Also, should interest rates rise, or your income drop, you could struggle to make your repayments.
How can you take funds from a lifetime mortgage?
You can either choose a lump sum or monthly payments as a means of receiving funds from a lifetime mortgage. A ‘drawdown’ – whereby a sum of money is set aside from the mortgage to draw upon as required – is a popular option, as you are only liable to pay interest on the funds you release.