Are Lifetime Mortgages a Good Idea? – Guide, Advice & More
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Are lifetime mortgages a good idea? To answer this question you must first have up-to-date and accurate information on equity release in the UK.
In this guide, we explain how lifetime mortgages work and answer a host of common questions surrounding these loans, including if they are a good idea or not. Get the facts below!
Equity release explained
Equity release is a method of borrowing for older homeowners and is often used as a way to fund retirement. The homeowner borrows against their home and receives a lump sum payment. This lump sum is not repaid like a conventional loan with monthly repayments.
It is repaid in one single payment when the homeowner dies or moves into long-term care. This is achieved by selling their property and using some of the sale proceeds to clear the debt.
There are two types of equity release in the UK and these are called lifetime mortgages and home reversion plans. You should engage with an equity release financial adviser before applying for either, and you should only apply to lenders that are authorised and regulated by the Financial Conduct Authority.
You must be at least 55 years old and own your main residence without a mortgage or other debts secured against your home to use equity release schemes.
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What is a lifetime mortgage?
A lifetime mortgage is one of two ways to do equity release as a senior homeowner. It can be used for a variety of reasons but is usually used to help improve the quality of later life and fund retirement. The amount you can borrow will be determined by the lender, your age, the value of your property and other details about the property which are assessed by the lender’s surveyors.
How does a lifetime mortgage work? (with an example!)
A lifetime mortgage works by providing the homeowner with a cash lump sum and asking for no repayments. However, the loan is still charged with interest. The interest does not need to be repaid each month either, but it does roll up and get added to the total debt.
This means the longer you have your lifetime mortgage the bigger your debt will become. So when it is time to repay – after you die or move into care – you could have to pay back a lot more.
For example, Henry takes out a lifetime mortgage and receives a lump sum loan payment of £65,000. As part of his agreement, he has agreed to pay a fixed rate of 6.4% interest on the loan. Sadly after 12 years, Henry passes away and it is time to repay the loan. By this time, Henry’s lifetime mortgage debt has grown to over £135,000 – more than double the amount taken out.
What happens at the end of a lifetime mortgage?
A lifetime mortgage ends when the homeowner dies unless there is another homeowner listed on the equity release plan. In that case, the lifetime mortgage continues until the last surviving homeowner has died or moved out of the property into long-term care.
At this point, the property must be sold and the debt repaid to the lender. This may fall upon the estate beneficiaries or executor of the will to handle, and they may be given as long as one year to make the property sale.
However, if the homeowner or estate beneficiaries want to keep the property they can use cash from the estate to pay off the lender and keep the family home. In this case, the property would not be subject to Stamp Duty. Alternatively, they could pay cash into the estate to create sufficient funds to pay off the debt and keep the property, in which case Stamp Duty may be owed.
Lastly, the estate beneficiaries could choose to buy the property when it goes on the market. This will give them the option of securing a residential or buy-to-let mortgage to help them fund the property purchase, which would be subject to Stamp Duty.
Can you pay back a lifetime mortgage?
Lifetime mortgages can be paid back early while one for the equity release plan holders is still alive and living at their property. However, many equity release plans have eye-watering early repayment charges and doing so can be unaffordable to most people.
It is also possible to continually pay back some of the debt without incurring these fees. This is done with a flexible lifetime mortgage, which is just one variation of a standard lifetime mortgage.
What is a flexible lifetime mortgage?
A flexible lifetime mortgage works the same as standard lifetime mortgages but permits the homeowner(s) to make voluntary monthly repayments on the interest charged. This may be a percentage of the interest or all of it and the homeowner has the right to stop making repayments if desired.
Many people choose to make repayments to stop the debt from growing exponentially and to ensure their loved ones receive a larger inheritance when the time comes.
Lifetime mortgage early repayment charges
As previously mentioned, early repayment fees could be applied if you choose to pay the debt off early. And they may be applied if you move to a less valuable property with the lifetime mortgage and need to pay off some of the loan to do so (unless you have a downsizing clause!).
Some early repayment fees can be as high as 25% of your loan amount or current debt, whereas other lenders reduce the fee as time moves on. There are some lifetime mortgage providers that will not charge you any early repayment fees after 10 years, but at this point, your loan may have substantially grown and be expensive to repay anyway.
Other types of lifetime mortgages
A flexible lifetime mortgage is just one variation of a lifetime mortgage. Two other popular types are drawdown and enhanced lifetime mortgages, which we explain below:
Drawdown lifetime mortgages
A drawdown lifetime mortgage is the same as a standard lifetime mortgage but the loan is not paid out in the same way. Instead of receiving one tax-free lump sum, the homeowner receives an initial lump sum and then leaves the rest of their loan amount in a cash reserve with the lender. They can access the rest of the loan as and when needed. Some of the reasons for doing this are:
- It saves on interest because only the money you receive is subject to interest, making them cost-effective if you were only going to keep the money in your bank account.
- It reduces your immediate wealth and might maintain your eligibility to receive means-tested benefits from the government.
- It can help you budget through retirement or help budget for big projects like home renovations.
Enhanced lifetime mortgages
Enhanced lifetime mortgages are an option for people with poor health who want to access more of their equity than what is being offered through standard lifetime mortgages.
The premise is that people with poor health and serious conditions have a shorter life expectancy or a shorter duration before requiring long-term residential care. Thus, the lender is willing to lend them more because it is likely the debt will need to be repaid quicker.
The application process involves a health and lifestyle questionnaire, and the lender may ask for medical reports. But they will never request a new medical. They are most used by people with terminal conditions who want to improve the quality of the rest of their life with private medical services and treatments.
What are the pros and cons of a lifetime mortgage?
The benefits of using equity release are:
- You can receive a loan with no monthly repayments
- Continue living in your property as normal
- Only repay the debt after death or moving into care
- Spend the money on any purpose
- The money is tax-free
On the flip side, lifetime mortgages can grow to become very expensive, which eats into the inheritance you plan on leaving behind for loved ones. They’re also difficult to get out of due to early repayment charges.
Where can you get an equity release lifetime mortgage?
Equity release lifetime mortgages are available from specialist companies that either deal entirely with equity release loans, or similar businesses that also offer investment, retirement and insurance products. A limited number of banks offer lifetime mortgages in the UK, such as Nationwide, and those that do often offer them through equity release companies only.
Some examples of providers are:
- More 2 Life
- Legal & General
- Pure Retirement
Are lifetime mortgages safe?
All lifetime mortgages are safe – i.e., not a scam – when the company providing the equity release loan is authorised and regulated by the Financial Conduct Authority. This shows the company is legitimate and a legal lender in the UK.
Moreover, it is only recommended that you take out a lifetime mortgage through a company that is a member of the Equity Release Council, which we discuss in further detail below.
Consider Equity Release Council members first
The Equity Release Council is a group that strives to improve the quality of service and standard within the equity release sector. They invite all equity release financial advisers and lenders to join the group and follow their rules and guidelines relating to services and products. They are not obligated to join.
Yet, most advisers and lenders choose to join the council and follow the rules because it can be beneficial to them. The rules have been made to provide homeowners with assurances, protection and benefits when taking out an equity release plan. And as a result, many homeowners will only consider Equity Release Council members.
One example of a rule that members must agree to is the negative equity guarantee. The negative equity guarantee is a promise that your lender will not chase you for any debt that has not been repaid by the money raised from the sale of the property because it was not enough.
Property sale money may not cover all of the lifetime mortgage debt if the loan has been active for a long time, the value of your property declines in value – or a combination of these things. Any outstanding debt after the property sale is not recoverable thanks to the negative equity guarantee.
Are lifetime mortgages a good idea?
Lifetime mortgages can be a good idea for people in later life who need money to fund their retirement or improve the quality of their life. They are only a good idea after you have explored alternatives to equity release – such as downsizing – and fully understand these loans with the help of an equity release adviser.
Equity release is usually an easier decision if you do not have people relying on an inheritance from you.
Where can you get lifetime mortgage advice?
You should choose to get lifetime mortgage advice from a financial services company that has experience in the equity release industry rather than generic advice. There are many companies available to help and some exclusively deal with equity release. Independent advisers may also offer a brokerage service to help you find suitable deals and make your application.
What does Martin Lewis think of lifetime mortgages?
Martin Lewis has been on record to say that lifetime mortgages can be a good idea for some people in certain situations. He continued to say that anyone considering this option should leave it as late as possible and release as little equity as required.
What is the difference between equity release and a lifetime mortgage?
The difference between equity release and a lifetime mortgage is that equity release is the overarching name for equity release loans and a lifetime mortgage is one of those loans. All lifetime mortgages are a type of equity release, but not all equity release uses a lifetime mortgage.
It’s also important to note that equity release and releasing equity are not the same thing!
Will equity release stop my pension?
Taking out an equity release plan will not stop you from receiving your state pension as normal. This is because basic state pension payments are not means-tested. However, if your wealth increases significantly by using equity release and you hold onto the money, you could become ineligible to receive some means-tested state benefits, including Pension Credit payments.
How does a home reversion plan work?
As mentioned at the start of this guide, there is another type of equity release called a home reversion plan. Home reversion plans are less often used but can still be considered.
They exchange the equity loan for a percentage of a property’s future sale which is much greater, and as such, they do not charge their customers any interest. For example, taking out 20% equity can mean giving up 80% of your home’s value in the future when it is sold. If the value of your home increases then the loan repayment is even bigger.
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