What is a Lifetime Mortgage? How It Works •

A lifetime mortgage is a type of equity release product that allows homeowners aged 55 and over to access tax-free cash from their property without having to move out. It is a loan secured against your home, which is repaid when you die or move into long-term care.

With a lifetime mortgage, you retain full ownership of your property and can choose to receive the funds as a lump sum or in smaller amounts over time. The amount you can borrow depends on factors such as your age, property value, and individual circumstances.

Lifetime Mortgage as a Type of Equity Release

Lifetime mortgages are one of the two main types of equity release products, the other being home reversion schemes. While a lifetime mortgage allows you to retain ownership of your property, a home reversion scheme involves selling all or part of your home to the lender in exchange for a lump sum or regular payments.

As a secured loan, a lifetime mortgage is tied to your property, and the lender has the right to sell the property to recover the loan amount if the terms of the agreement are not met. However, with a lifetime mortgage, you have the right to remain in your home for life or until you move into long-term care.

Key Features of Lifetime Mortgages

One of the main advantages of a lifetime mortgage is that you retain property ownership. This means you can continue to live in your home and benefit from any future increases in its value. The loan is only repaid when you die or move into long-term care, typically through the sale of the property.

Another key feature is that the cash released from a lifetime mortgage is tax-free. You can use the money for various purposes, such as home improvements, paying off debts, or providing financial assistance to family members. However, it’s essential to consider the impact on your inheritance and means-tested benefits, as the loan and accrued interest will reduce the value of your estate.

How Do Lifetime Mortgages Work?

When you take out a lifetime mortgage, you borrow a portion of your home’s value and receive it as a lump sum or in smaller amounts over time. The loan, along with the accrued interest, is repaid when you die or move into long-term care, usually through the sale of the property.

The amount you can borrow depends on factors such as your age, property value, and the lender’s criteria. Typically, older borrowers can access a higher percentage of their home’s value compared to younger borrowers.

Interest Payment Options

One of the key decisions when taking out a lifetime mortgage is how you want to handle the interest payments. You have two main options:

Rolled-up interest: With this option, you don’t make any monthly interest payments. Instead, the interest is added to the loan balance and compounded over time. This means the amount you owe increases as interest accrues on both the original loan and the accumulated interest.
Monthly interest payments: Some lifetime mortgages allow you to pay some or all of the monthly interest. This can help reduce the overall cost of the loan, as the interest doesn’t compound as quickly. However, you need to ensure you can afford the monthly payments.

The interest rate on a lifetime mortgage can be fixed or variable, and it is typically higher than a standard residential mortgage rate. The rate you are offered will depend on factors such as your age, property value, and the lender’s criteria.

Loan Repayment

The loan, along with the accrued interest, is repaid when the last surviving borrower dies or moves into long-term care. This is typically done through the sale of the property, and any remaining funds after the loan repayment go to your estate.

Most lifetime mortgages come with a no negative equity guarantee, which means you or your estate will never owe more than the value of your property when it is sold. This protects you and your heirs from owing any additional debt if the property value decreases.

Drawdown Facility

Some lifetime mortgages offer a drawdown facility, which allows you to receive an initial lump sum and then access additional funds as needed. This can be useful if you don’t need the full amount right away or want to minimize the interest accrued on the loan.

With a drawdown lifetime mortgage, you have a cash reserve that you can draw from as needed. Interest is only charged on the amount you have withdrawn, not the entire reserve. This can help reduce the overall cost of the loan compared to taking a large lump sum upfront.

Eligibility for Lifetime Mortgages

To qualify for a lifetime mortgage, you need to meet certain criteria set by the lender. These typically include age and property requirements.

Age Requirements

Most lifetime mortgages are available to homeowners aged 55 and over. Some lenders may have a higher minimum age requirement, such as 60 or 65.

There are also specific types of lifetime mortgages, such as payment term lifetime mortgages, which may have a lower age requirement. For example, some payment term lifetime mortgages are available to homeowners aged 50 and over.

Property Requirements

The property securing the lifetime mortgage must meet certain criteria set by the lender. This typically includes:

Property value: There is usually a minimum property value requirement, which can vary depending on the lender. Some lenders may also have a maximum property value limit.
Property condition: The property must be in good condition and well-maintained. The lender may require a structural survey to assess the property’s condition.
Leasehold properties: If your property is leasehold, there may be additional requirements, such as a minimum remaining lease term.

It’s important to note that not all properties are suitable for a lifetime mortgage. For example, some lenders may not accept properties with certain types of construction or those located in specific areas.

Costs and Considerations

Taking out a lifetime mortgage is a significant financial decision that can have long-term implications. It’s essential to consider all the costs involved and how it may impact your inheritance and means-tested benefits.

Fees and Charges

There are several fees and charges associated with taking out a lifetime mortgage, including:

Fee Type	Description
Arrangement fee	A fee charged by the lender for setting up the lifetime mortgage. This can be a fixed amount or a percentage of the loan.
Valuation fee	A fee for a professional valuation of your property, which is required by the lender.
Legal fees	Fees for legal advice and services related to the lifetime mortgage, such as conveyancing.
Advice fee	Some financial advisors may charge a fee for their services in helping you find and apply for a suitable lifetime mortgage.

It’s important to factor in all these costs when considering a lifetime mortgage, as they can add up and impact the overall cost of the loan.

Impact on Inheritance and Benefits

Taking out a lifetime mortgage can have a significant impact on your inheritance and means-tested benefits:

Reduced inheritance: As the loan and accrued interest are repaid from the sale of your property, it will reduce the value of your estate and the amount available to pass on to your heirs.
Affect state benefits eligibility: The cash released from a lifetime mortgage may affect your eligibility for means-tested state benefits, such as pension credit or council tax support.
Tax implications: While the cash released from a lifetime mortgage is tax-free, it may have implications for inheritance tax or other taxes depending on how you use the funds.

It’s crucial to seek professional financial advice to understand how a lifetime mortgage may impact your specific circumstances and to explore alternative options that may better suit your needs.

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Robert Shiller

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