Flexible Lifetime Mortgage – Complete Overview
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To understand what a flexible lifetime mortgage is and how it works, you must first understand how a lifetime mortgage works. If you already know all about lifetime mortgages, scroll halfway down our guide to uncover the key details about flexible lifetime mortgages.
What is a lifetime mortgage and how does it work?
A lifetime mortgage is one of two types of equity release plans, which are methods of borrowing against home equity for senior homeowners without needing to make monthly repayments.
If you are a homeowner with no outstanding mortgage and at least 55 years old, you might be approved for a lifetime mortgage loan, which gives up to 60% of your equity as a tax-free lump sum. This loan is charged with fixed interest that builds up and adds to the debt total rather than needing to be repaid each month.
The total debt is repaid when you die or move into care through the sale of your property. The money raised from the sale is first used to pay off your debt before any remaining funds are passed to you or the beneficiaries of your estate.
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Who can get a lifetime mortgage?
A lifetime mortgage is available to anyone over the age of 55. Some lenders may require you to be below a certain age, often 85. You must be aiming to release equity from your main residence which has no existing mortgage or secured debt attached to the property. Some lenders will allow a small debt attached as long as you plan to repay this debt with your equity release loan.
If you qualify to apply, the lender will send surveyors to assess your property, work out the value of your home, and decide if they are willing to provide you with an equity release plan, and if so, how much they are willing to lend you.
What is the purpose of lifetime mortgages?
Lifetime mortgages are used as a way for older people to access a tax-free lump sum payment to use as part of their retirement. The money may be spent gradually over many years to improve the quality of living, or it could be earmarked for specific expenses, such as annual holidays, home improvements or private medical or care services at home.
You are even allowed to give the money away to family and friends if desired.
What are the pitfalls of a lifetime mortgage?
The pitfalls of getting a lifetime mortgage is not fully understanding what you are committing to, not exploring alternative finance solutions, and not understanding the consequences of these agreements.
For example, a lifetime mortgage of £65,000 charged with 6.4% interest will grow to a debt almost worth £137,000 after just 12 years. They are expensive loans over the long term and will affect how much inheritance you pass on to family or friends.
Thankfully, lenders who are members of the Equity Release Council must commit to a negative equity guarantee which states you never have to pay back more than what your home sells for. This added protection and other reassurances are guaranteed when you choose lenders that are members of the council.
Can you pay back a lifetime mortgage?
If you decide that you do not want a lifetime mortgage anymore, it is possible to repay all of the loan and any interest to exit the credit agreement. However, you will probably need to pay an early repayment charge, which will be a percentage of the total debt owed.
Because lifetime mortgages are supposed to last the rest of your life, these early repayment costs can be excessive. However, there are some lenders that rescue these charges over time all the way to 0%. For example, at the time of publication and subject to change, More 2 Life and LV charge 0% after ten years. But of course, after a decade the cost of your loan will have already increased significantly.
The other option is to pay some of your debt back each month even though it is not required. This is where a flexible lifetime mortgage comes in.
What is a flexible lifetime mortgage?
A flexible lifetime mortgage works in the same way as a standard lifetime mortgage, but the homeowner can choose to make voluntary monthly repayments of their choosing, and they can cease their repayments if needed. Most people who take out a flexible lifetime mortgage do so to pay back most or all of the interest charged each month.
It may also be referred to as an interest-only lifetime mortgage, but this can be confused with a residential mortgage product.
Why use a flexible lifetime mortgage?
If you use a flexible lifetime mortgage and repay all of the interest each month, the amount you have to pay back from the proceeds of your home sale after moving into care or after death will be the same as the loan amount borrowed.
The main reason for doing this is so the loved ones who are set to inherit your estate will receive much more of your wealth than if you never repaid any of the inheritance. Some parents may feel guilt for using equity release and denying their children the family home in the future, but using a flexible lifetime mortgage can feel like a sort of middle ground. If it keeps the debt really low, the estate beneficiaries may be able to pay off the lender with cash and keep the property, if permitted to do so.
Flexible lifetime mortgage examples
Let’s imagine you take out an equity release mortgage of £50,000 and are expected to pay 4.5% interest on the loan each month. The interest debt is repaid each month as a direct debit from your bank account to the lender, so the debt never increases from the initial £50,000 owed. Thus, when it comes to repaying the loan, only £50,000 will be taken from the property sale money.
You can always stop making some or all of your interest repayments and you will not be chased for these payments. But your total debt will start increasing.
Flexible lifetime mortgage rates
The interest rate on a flexible lifetime mortgage can range from as low as 2% up to around 8%. The interest rate you are offered will depend on your age and specifics about your property.
What is a flexible lifetime mortgage calculator?
A flexible lifetime mortgage calculator is an online calculator found on some lender websites. It will allow the user to input how much they want to borrow and how much of their interest payments they want to pay back each month. The calculator will then show what your total debt is likely to be over different time periods.
Other types of lifetime mortgage
A flexible lifetime mortgage is not the only deviation away from standard lifetime mortgages. There are multiple other types, including but not limited to:
#1: Drawdown lifetime mortgage
A drawdown lifetime mortgage does not provide the loan as a lump sum payment. Instead, the homeowner receives a drawdown facility where they can take smaller regular payments over a period. This could be beneficial if you are worried that taking a lump sum could stop any means-tested benefits you receive from the government.
#2: Enhanced lifetime mortgage
An enhanced lifetime mortgage is aimed at people with poor health or a serious medical condition. The lender may be willing to loan against more equity if the applicant is deemed to have a medical problem that will reduce their life expectancy, or the time before needing residential care. This type of lifetime mortgage is mostly used by people who want to borrow more to pay for first-class healthcare services and improve their quality of later life.
What is the difference between a lifetime mortgage and equity release?
A lifetime mortgage is one method of equity release for seniors, which should not be confused with releasing equity which is available at any age. The difference between a lifetime mortgage and equity release is that equity release may also refer to a second product used by homeowners in later life, namely a home reversion plan.
Another way to think of it is that all lifetime mortgages are equity release, but not all equity release is a lifetime mortgage.
What is a home reversion plan?
The other type of equity release plan is called a home reversion plan. This plan is fundamentally the same in who can apply and when the debt is repaid (with no monthly payments), but it does not charge any interest. Instead, the company asks for a fixed percentage of the future property sale money, which is usually always more than double the loan amount.
Only ever consider equity release after speaking with a financial adviser and only apply to lenders that are authorised and regulated by the Financial Conduct Authority.
Do you want to know more?
For further details about the different types of lifetime mortgages, check out our equity release hub now. We have over 100 guides on this topic, and they’re all free to read!