Have you encountered the term ‘Lifetime Mortgage’ – but are unsure what it means? Then you are in the right place.
There are lots of questions you may have about this phrase, and in this blog below, we have answered all of them. Read on for a clear answer to your important questions.
What is a Lifetime Mortgage?
A Lifetime Mortgage is a product exclusively for older homeowners. The lender provides tax-free cash or ‘equity release’ to the homeowner which is repayable only when they die or move into long-term care. The cash is available either as a lump sum payment or in a series of separate payments over time. Interest is charged daily on the amount of equity released plus the interest and deducted at the end of the mortgage.
A lifetime mortgage allows the homeowner to benefit from some of the equity or capital value of the house without having to move out or make monthly payments, although they may still choose to do so to pay down the interest. Typically it will include a clause which guarantees that the homeowner can never owe more than the value of the house, termed a ‘no negative equity’ clause.
Who Qualifies for a Lifetime Mortgage?
Qualification requirements vary between provides, but in most cases eligibility criteria for a lifetime mortgage requires that the homeowner:
- Is over 55 years of age;
- Has paid off the mortgage or has only a small amount outstanding;
- Occupiers a property which is well maintained;
- Uses the property as their main residence;
- In some cases, the lender may require the property is valued at a minimum threshold.
Can you sell your house if you have a lifetime mortgage?
Yes, you can sell your house if you have a lifetime mortgage, subject to certain criteria. It is possible to sell your house if you move to a ‘suitable alternative property’ as defined by the Equity Release Council. If the property meets these standards there are two options:
- Transfer the existing lifetime mortgage to the new property;
- Repay the existing lifetime mortgage in full and take out a new one on the new property.
In both of these cases, the process is similar to getting a new mortgage and therefore it will be subject to the usual due diligence checks. You will need to speak to your mortgage provider and it is beneficial to use a mortgage broker who understands the range of products available and which may be most suitable to your situation.
Pros and cons of a lifetime mortgage
Whether a lifetime mortgage is right for your will depend on your personal circumstances. The pros include:
- Tax-free cash – a lifetime mortgage enables the release of some of the equity you hold in your property giving you ready access to cash. This can be taken as a lump sum or released over time in a number of smaller payments;
- No/flexible repayments – because the equity release (plus interest) is only due when you die or move into long-term care there are no repayments to make. That said, you may decide to make voluntary payments to lower the eventual cost;
- No spending limitations – there are no restrictions on how you can use the released equity so you can spend it as you wish, whether that is to travel, undertake home improvements, help your children or simply have more cash in retirement;
- No need to move (unless you want to) – you can remain in your home until you die or move into long-term care. However if you do want to move, it is also possible subject to the new property meeting certain minimum criteria;
- Inheritance protection – part of the property value can be protected if you wish to pass it on after you die;
- No negative equity – lifetime mortgages include a clause which guarantees that you will never owe more than the value of the property when it is sold which removes the risk of going into negative equity.
Conversely, the cons of a lifetime mortgage include:
- Interest accrual – if you elect to ‘roll-up’ your interest, that is to pay it as part of the lump sum when you die or move to long-term care, the final interest bill can be substantial. The interest rate on a lifetime mortgage is usually higher than a traditional mortgage too. Depending upon the length of the equity release it may mean that it may be cheaper to borrow money elsewhere;
- Lower inheritance – because you are taking equity out of your house and adding interest, this will be deducted from the amount of wealth you will pass on in inheritance when you die;
- Early repayment fees – once you take a lifetime mortgage you will be liable for early repayment fees should you want to repay all or a large proportion of the loan early, such as if you decide to move house. If you remortgage to take a lifetime mortgage too, you may need to pay an early payment fee for that too;
- Lower state benefits – if you receive means-tested state benefits the amount you are entitled too may fall if you release equity through a lifetime mortgage.
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