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Lifetime Mortgages

If you need to secure a mortgage for the long-term, that needs to be repaid when you die or go to long-term care, then a lifetime mortgage may be for you.

Read on to find out how these mortgages work and the pros and cons of taking out this kind of loan.

What is a Lifetime Mortgage?

These mortgages are a form of Equity Release, which means that it is a long-term loan secured against a property. The difference between a lifetime mortgage and other mortgage types is that the amount of money you can borrow is determined by the value of your home and your age, rather than income level.

See More About Equity Release in our Guide.

The way the mortgage is repaid also differs with lifetime mortgages, the loan is repaid when the borrower dies or goes into long-term care. These deals still charge interest, only the way the borrower pays back the interest can be done in two ways; monthly repayments or ‘rolled-up’ interest. Rolled-up interest is where the interest payable every month is added to the total amount you owe, so essentially you pay interest on the interest. This is then covered with a house sale at the end of the lifetime mortgage.

Am I Eligible for a Lifetime Mortgage?

• Minimum age bracket for this type of mortgage is 22-60 years of age. The older you are, the more money you will be permitted to borrow by any given lender. As a rough guide, if you are aged 65, you can borrow up to 30% of your home’s value. If you are older, you can borrow closer to 50%.
• Your home will need to be of a specific minimum value, for instance, £70,000 -£100,000.
• Often lenders will stipulate that you need to borrow at least £10,000 to take out a lifetime mortgage.

If you do not match the above criteria and you would still like to remortgage your home for home improvements, take a look at our Guide to Remortgaging.

What are the Main Types of Lifetime Mortgage?

There are four main types of lifetime mortgage, with their own specific features, they are as follows;

Home Income Plan – These are a less commonly found type of lifetime mortgage. This is where you borrow money against your property and the money released then goes towards buying an annuity. Annuity is a guaranteed income which is dependent on your age, health, and other factors. When the borrower releases your loan as a lump sum, this automatically goes towards the annuity. You receive your annuity pay out every month, giving you an income to live on for the rest of your life, or when you go into long term care. Interest is charged on the original lump sum released.

Cash Schemes – Rather than receiving a lump sum of money to go into an annuity, you receive just the lump sum, which you can use for whatever you wish, making them more flexible than Home Income Plans. The interest charged can be paid off monthly or compounded against the original loan amount (rolled-up).

Draw Down Schemes – With this type of lifetime mortgage, you agree to borrow money against your home equity, only instead of this going to you, it is transferred to a facility set-up by the lender. Once this has been created you can ‘draw down’ a certain percentage of the total loan at different intervals of your choosing. This means that interest is only charged on the money you withdraw from the total amount of the loan. This deal will charge less in total interest if you do not choose to withdraw all of the funds before the lifetime mortgage ends. Some draw-down schemes may have some restrictions on time limits and the amount you can draw-down at once. This scheme is flexible too, if you would prefer, you can use the facility to pay yourself a monthly income, like with the Home Income Plan.

Shared Appreciation Mortgage – This is a mortgage where you borrow a certain amount of money against your home but instead of paying interest, the lender secures a certain portion of the increase in the value of your home over time. For example, they may ask for a quarter of the increase in value of your property. The period used to set this benchmark is the day you take out the mortgage until the day you die or go into long-term care. This type of mortgage poses a slightly higher risk to lenders, as house prices, in general, may stagnate.

Let’s Look at a Lifetime Mortgage Example;

Maureen and Harry have paid off their mortgage and will be going into retirement within the next three to five years.

They would like to buy a motorhome and boost their retirement income every month, so they can afford to spend weekends sightseeing around the country.

Their home is worth £100,000 and they would like to borrow £25,000 in a lifetime mortgage. Maureen and Harry look at the Cash Scheme option. With this, they would get the money to buy the motorhome, as well as the leftover funds to pay themselves some retirement income. However, Harry is not looking to make interest payments on money he doesn’t need until retirement. He also does not want the interest payable to be compounded against the loan.

They instead decide to opt for a Draw Down Scheme. This enables them to draw down just the cash needed to buy the motorhome now, with the rest of the money staying in the bank until they can draw an income down, month-by-month, in the future.

What are the Benefits of a Lifetime Mortgage?

• Interest Flexibility – These mortgages give borrowers more flexibility in deciding how their interest is paid. You can choose to compound it against the value of your home, or pay it off every month.
• Money for Home Improvements – If you have paid off all your mortgage, borrowing some of the money back to make home improvements is a great way for older people to keep their homes accessible and safe for them to live in when they get older and less mobile.
• Retirement Income – With lifetime mortgages, retired people can use the equity in their home to pay themselves a monthly income. This can ease financial pressures and enable the mortgage holder to enjoy their new retirement lifestyle.

What are the Pitfalls of a Lifetime Mortgage?

• Cost of the Loan – There will be set-up costs for these types of mortgages, which could run into the thousands. Also, the equity from your home is being used to secure the loan. This means there will be less money to leave to your family, when the lifetime mortgage ends and your house is sold.
• Early Repayment Penalties – These types of mortgages are designed to end with the sale of a property. This means there are likely to be early repayment penalties for paying off the loan early.
• Difficulty Moving House – These mortgages are often portable; however, some may struggle to sell their home with a lifetime mortgage. This is true when the house you want to move to costs more than the equity still left in your current home. Some lenders will also disallow your mortgage to be ported to a sheltered housing property, as it will be more difficult for them to sell on at the end of the mortgage.
• Benefits Entitlement – Taking out a lifetime mortgage may mean that you are no longer eligible for pension credit and council tax benefits.

What are the Alternatives to Lifetime Mortgages?

Home Reversion Plan – This is a sale rather than a mortgage. A home reversion provider offers to buy your home (for less than its market value) and rent it back to you. You will then be given a lump sum from the sale proceeds. You can choose to sell all or part of your property in this way. If you need further money, you can choose to pay more in rent and the provider will boost your funds from the sale proceeds. With this scheme, you can borrow more than in a lifetime mortgage (sometimes up to 60% of your home’s value). There is also a minimum inheritance clause in these contracts, meaning that if you die soon after the sale is made, there is a minimum amount your heirs can inherit from your estate.

Downsize – If you have paid off your mortgage and are looking for extra retirement income, selling your house and buying a cheaper one can be a good alternative to taking out a retirement mortgage.

Taking out a lifetime mortgage is not a decision you should take lightly. An independent financial advisor can help you make the right decision and offer you a free, no-obligation quote. Get a quote today.