Lifetime Mortgage Advice – Where to Look & More
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If you want to take out a lifetime mortgage, you will need to receive lifetime mortgage advice first. Lifetime mortgages are huge commitments that are likely to stay with you for the rest of your life and can have significant implications and consequences.
In this MoneyNerd post, we explain everything you need to know about lifetime mortgages and some tips that could help before you can apply and take out a lifetime mortgage.
Equity released in a nutshell
Equity release is a tax-free way for some older homeowners to access credit in later life – i.e. home equity – which is often used to help fund their retirement or help them to retiree earlier, but not exclusively. It allows you to borrow against some of the value of your property and not have to make regular loan repayments each month.
The loan is only required to be repaid when the (last surviving) equity release plan holder either dies or moves into long-term care. The debt must be paid in full at this point, which is made possible because the lender has the right to force the sale of the property and take money from the sale proceeds to clear the debt.
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Who can use equity release?
Equity release can only be used by people who are over the age of 55, hence why it is a method of borrowing to improve the quality of later life. If there are two homeowners who want to take out an equity release plan together, both individuals must be aged 55 or above. Sometimes an older age restriction is applied around 85 years old.
These plans allow you to borrow against the equity in your home, but you usually need to have paid off all existing debts secured against the property to apply, meaning you must have 100% equity. Thus, your loan will be a percentage of the value of your home up to 60% or 80% at most, depending on what type of equity release scheme you use.
What are the different types of equity release?
There are two types of equity release plan seniors can choose from to receive a tax-free lump sum or drawdown loan. These are called lifetime mortgages and home reversion plans. A lifetime mortgage is significantly more popular and widely advertised than the latter.
Before comparing lifetime mortgages and applying, you must get lifetime mortgage advice first. You can avoid scam companies by only considering lenders that are authorised and regulated by the Financial Conduct Authority, and by verifying this on the Financial Services Register.
Lifetime mortgages and home reversion plans work in the same way as we have described equity release above. They can provide a lump sum or drawdown loan with no monthly repayments required. The debt is only paid back using the property sale after death or moving into residential care.
But lifetime mortgages and reversion plans also have big differences. We focus on the more popular lifetime mortgage products below, but stick around until the end of this guide to learn how a home reversion scheme works.
How does a lifetime mortgage work?
A lifetime mortgage works by charging interest on the loan. If you take out a lump sum then a fixed rate is applied to all of the loan from the outset, but if you take a drawdown, the interest is only charged on the initial lump sum and then any drawdown amount thereafter.
The interest does not need to get repaid each month either. The amount of interest charged each month gets added to the total amount owed. Whatever this total amount is by the time the loan needs to be repaid – i.e. after the last surviving plan holder dies or moves into care – this is how much will be recovered from the value of your home when it is sold.
If your lender abides by the negative equity guarantee, they can never chase debts that exceed the sale value of your home. More on this later!
Lifetime mortgage example
It is easier to understand how lifetime mortgages work with a simplified example. Let’s imagine John and Mary are in their early 60s and want to use equity release on their £200,000 home to take out a tax-free lump sum in later life so they can retire a few years earlier than otherwise would be possible.
They work out that they need £65,000 so they can both retiree earlier than originally planned and take out a lifetime mortgage with a fixed interest rate of 6.4%. They release this amount of equity as a lump sum and after eight years John passes away. Because Mary is named on the equity release plan and is still alive and living in the property, the debt does not need to be repaid when John dies.
Mary passes away four years later, making it 12 years since the lifetime mortgage was taken out. By this time, the debt needs to be repaid and due to the rolled-up interest debt, the total owed now stands at around £137,000. Their property has increased in value by this time to £235,000 and sells at market value.
From this £235,000, around £137,000 is taken by the lender to clear the loan debt and the remaining £98,000 (approx.) is put back into Mary’s estate for her estate beneficiaries.
What can a lifetime mortgage be used for?
Lifetime mortgages are most often used as ways to fund retirement, allow homeowners to retiree earlier or simply improve the quality of living in later life. They are also frequently used for home improvements, private medical expenses, investments, debt consolidation, frequent holidays and trips, or the money may be given away.
The most common reasons for giving away money is to help children buy their first home or to start a family business.
What is the criteria for a lifetime mortgage?
The criteria to apply for a lifetime mortgage is the same as the criteria to apply for equity release in general.
You’ll need to be at least 55 and releasing equity from your main residence that you have 100% equity in. This means you will not be able to apply while having any debts secured against your home, including a residential mortgage. The value of your home may need to meet a minimum valuation set by the lender. If these minimum valuations are applied, they usually stand around £80,000.
What are the pros and cons of a lifetime mortgage?
The benefits of a lifetime equity release mortgage are:
- You can choose from a lump sum or drawdown
- The money is tax-free
- It can help with finances in later life but spent on anything you wish
- There are no monthly repayments
- Make voluntary interest payments to reduce the eventual debt
- Continue living in your property as normal
The main drawback of using an equity release plan is that they are expensive to repay. You can expect to pay at least double the amount back if you hold the lifetime mortgage for any considerable amount of time. Some other disadvantages of equity release are:
- Increasing your wealth can affect entitlement to means-tested benefits
- Most lifetime mortgages have an excessive early repayment charge – not all of them and some lenders reduce these fees over time
- There are multiple costs payable to set up your equity release loan
Are lifetime mortgages safe?
Lifetime mortgages are a legitimate type of lending and are safe to use as long as you use a legal equity release company or bank, and preferably, a company that is also a member of the Equity Release Council.
We explain more about the Equity Release Council shortly.
Do I need lifetime mortgage advice?
Before applying for a lifetime mortgage you must receive lifetime mortgage advice. It’s wise to opt for a company that has experience in the equity release industry rather than generic financial advisers who do not regularly work in this niche area of credit.
There are a number of high-profile lifetime mortgage advice companies to choose from across the UK. These financial services companies can also be part of the Equity Release Council if they chose to be, and it is a good way of identifying legitimate service providers.
Who provides lifetime mortgage advice?
Lifetime mortgage advice can be sought from independent financial service companies or it can be gotten directly from some of the equity release lenders. Even if you get advice directly from a lender, the adviser must operate with strict professionalism and even advise you not to use a lifetime mortgage if there is a better solution available to you.
What is included in lifetime mortgage advice?
When you get lifetime mortgage advice, the adviser will:
- Explain how a lifetime mortgage works
- Explain the full costs of lifetime mortgages
- Explain how lifetime mortgages can have further implications, such as on your eligibility to receive means-tested benefits, moving home etc.
- Assess you for a lifetime mortgage
- Explore alternative solutions for you
- Answer any questions on any of the above
These are the standard discussion points within a lifetime mortgage consultation; your meeting could cover additional points. Your adviser may also work as a broker to help you find the best equity release deals.
How much does lifetime mortgage advice cost?
Lifetime mortgage advisers either charge a fixed rate for their service or a commission on your eventual loan. Most fixed fee services cost around £1,000 while most commission-based services can charge between 1% and 5% of your loan amount. So the cost-effective option will depend on the exact costs charges and the size of your lump-sum loan.
Why is the Equity Release Council important?
Using an Equity Release Council member ensures you only use legitimate financial advisers and lenders in the equity release sector. It also gives you additional assurances and guarantees when you take out a lifetime mortgage with one of these companies.
There are a number of rules that members must stick to as part of their voluntary membership, and most of them have been created as a way to offer homeowners more protection throughout their equity release plan.
The negative equity guarantee is one of the rules that lenders must abide by and it can save homeowners thousands of pounds. It states that a homeowner can never be charged or chased to pay a debt that has not been completely cleared after the sale of their property.
For example, if your home sold and did not raise enough cash to pay off the debt in full, any remaining debt cannot be hunted by the equity release lender. This could happen if the lifetime mortgage was held for many decades, and/or the homeowner’s property value unexpectedly sunk. The negative equity guarantee is just one of many additional benefits of using a lender that is a member of the group.
What are the pitfalls of a lifetime mortgage?
One of the major pitfalls of getting a lifetime mortgage is not fully understanding how they work and the overall cost to repay them, and how this will affect the wealth of your estate. This can be avoided by securing sound and reputable lifetime mortgage advice, as well as exploring alternatives first.
What is the difference between equity release and a lifetime mortgage?
Lifetime mortgages are a type of equity release, and because they are the most popular type, the two terms often get conflated and used interchangeably. However, this is not entirely correct because equity release can also refer to home reversion plans.
Can I buy a home with a lifetime mortgage?
It is possible to buy an investment property or holiday home using a lifetime mortgage, or to help someone you care about get on the property ladder. You can also move home and take your lifetime mortgage with you in most cases.
But it would not be possible to simply use your loan to buy a new residential property and move into it full-time. This is because the lifetime mortgage debt becomes payable when you stop living at the property in which you released the equity.
Can I remortgage a lifetime mortgage?
It is sometimes possible for a homeowner with a lifetime mortgage to switch to a different lifetime mortgage product. This would be done for a lower interest rate and to reduce the rate that their debt grows. It can be a complex process and may incur an expensive early repayment charge.
Other types of lifetime mortgages
There are some slight variations of the standard lifetime mortgage explained above. One of the most interesting is an enhanced lifetime mortgage, which may be used by people with poor health and medical conditions. It allows these people to access more of their equity than standard, often to help with medical bills.
The idea is that people with poor health will end up paying back the loan sooner with less chance of their property value decreasing significantly, so the lender is willing to let them release greater equity.
A word on home reversion plans
A home reversion plan works differently from a lifetime mortgage. These loans are applied with 0% interest. But the lender ensures a profit is made on the agreement by exchanging a loan to the value of some of your equity with the right to a much larger percentage of your property’s future sale money.
For example, for a 30% equity loan today you must give them 80% of the sale money in the future.
Does equity release affect your pension?
Equity release will not affect your right to a state pension because these government payments are not means-tested, meaning your wealth does not affect eligibility. But there are other benefits that could be reduced or taken away from you, such as Pension Credits and Universal Credit.
Will tax be taken from my equity release loan?
Tax will not be taken from your lifetime mortgage because it is a loan. There can still be some tax implications when using equity release if you give some of the money away. Some financial gifts can be subject to inheritance tax in certain situations.
Other things you need to know about equity release!
More information about debts secured against your home and other equity release topics can be found at MoneyNerd. All our informative articles are simple to read and kept 100% free!