What is a lifetime mortgage and is it the right option for you?

Whether you want to live life to the max or help younger generations, retirement can sometimes feel expensive; but a lifetime mortgage could help.

Just like any other home loan, a lifetime mortgage lets you borrow against the value of your property. However, unlike the mortgage you likely took out to buy your home, you don’t need to make monthly repayments. Instead you repay the money and interest charges when your home is eventually sold (when you die or move into care).

This is very different to older style forms of equity release, like home reversion schemes, which required you to sell a portion of your home to a lender for a price that was well below the market rate.

How does a lifetime mortgage work?

How you take the loan with a lifetime mortgage is up to you. You can take a lump sum from the get go if you have a major expense to pay, or you can set up a drawdown facility, enabling you to take money as and when you need it.

According to LV=, 41% of customers use lifetime mortgages to help repay debts (such as interest-only mortgages). While 23% want to help friends and family out with money.

Georgina Oxton, divisional manager equity release for the company says: ‘A significant proportion of our customers are paying back debts or refinancing. But we are also seeing that retirees want to help younger generations with those big milestone moments like going to university or buying a first home.’

She adds: ‘Drawdown is growing in popularity too, with people using it to top up their income or perhaps to pay for care in their home or a grandchild’s school fees.’

What’s the lending criteria for a lifetime mortgage?

Lifetime mortgages are typically available to homeowners aged 55 or 60 who have repaid (or very nearly repaid) their mortgages. How much you can borrow will depend on the value of your house and your age. The older you are, the more you can borrow.

Most people choose this option because they want to stay in their own home. But it should also still be possible to move – so long as your new home meets your lender’s criteria.

So far so good. The catch, however, is the costs.

How much does a lifetime mortgage cost?

First is the cost of setting up a lifetime mortgage. You’ll need to pay an application fee, a legal fee and potentially a valuation fee. You also need to get specialist financial advice to take out an equity release plan, which will carry a fee, unless you use an adviser that works on commission. How much you will pay will vary according to the provider and advisers you use, but set up costs can run to several thousand pounds.

Then there’s the interest charges that will be applied to your loan. As interest rolls up, the longer you live, the more expensive your debt becomes.

Will Hale, CEO of adviser Key explains: ‘Arguably, the biggest downside of equity release is that interest is added to the loan. You can find that this grows rapidly over time due to the impact of compounding. This will naturally impact how much you can leave as an inheritance and can reduce your financial flexibility in the latter stages of life if you have limited equity remaining and few other assets to fall back on.’

The table below takes the example of a 65-year-old borrowing £100,000 and shows how a debt can more than double over 25 years.

Age
Loan balance

65
£100,000

70
£115,927

75
£134,392

80
£155,797

85
£180,611

90
£209,378

Source: LV=
Assumes interest at 3% with no loan repayments

However, while your debt may grow quicker than you anticipate, there are safeguards in place and new product features have been added to tackle borrowers’ concerns.

So long as your product provider is a member of the Equity Release Council, a no-negative equity guarantee will come as standard. This means you will never owe more than the value of your home when it’s sold. Some providers have also introduced inheritance protection – enabling you to ring fence some money for loved ones – as well as optional penalty-free repayments to help keep interest at bay.

How much the cost of equity release bothers you will ultimately depend on your circumstances and desire to leave money to loved ones.

‘We’re actually seeing that younger customers are attracted to the idea of a living inheritance and want to see their family enjoying the money while they are fit and well,’ says Oxton.

She adds: ‘It’s also about peace of mind and freedom from money worries, which can weigh heavily on some people.’

Lifetime mortgages: the pros and the cons

Pros:

Let’s you access the equity in your home without selling it or moving
Taking out lump sums or top up your income
Spending the money as you wish
You do not have to make any repayments (unless you wish to) until your home is sold when you die or move into care
Porting your mortgage is possible, meaning you can still move if you wish

Cons:

The rolling up of interest means that the longer you live, the more expensive your debt will become
You may not be able to leave an inheritance to loved ones
Set up costs can be expensive
Can reduce your eligibility for means-tested benefits

Is a lifetime mortgage a good idea?

Whatever your views, it’s important not to take out a lifetime mortgage without a full understanding of its potential cost. You also need to consider the impact a lifetime mortgage could have on your ability to claim means-tested state benefits.

This is why it’s so important to talk your plans through, not just with an adviser but also with your family. Approach the issue with an open mind.

Hale says: ‘Paying off a mortgage can be seen as a big achievement and a precursor to retirement so some worry about taking on more borrowing. However, when they have time to talk this through with an adviser, they are far more comfortable. And understand their options as well as the safeguards that are part of the products.’

A lifetime mortgage could be a sensible option for you, but it’s important to think through all of the alternatives first. Downsizing for example might be more appealing if it could bring you closer to family. You may also find that there are other ways you could top up your income with these alternatives to equity release.

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