What is a Lifetime Mortgage?
- by Release your dreams
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- 06 Feb, 2019
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There are two main types of "equity release" available, they are lifetime mortgages and home reversions.
If you choose to take out a lifetime mortgage you will obtain a loan that is secured against you home. In most cases interest is then added onto the original loan amount (or "capital debt").
As with a usual mortgage, you continue to own your home and live in it. However, the loan (plus any accrued interest) needs to be repaid, this is usually upon your death or if you have to move into long-term care.
Do you make payments?
With some lifetime mortgages you do not make any payments while you live in your home these are known as Interest Roll-up Mortgages. This will increase the loan that needs paying. The amount the loan increases by will depend on the interest level you are charged and how long before you pay the loan off.
For example if you borrow £45,000 at an interest rate of 5% a year, and you do not repay the loan for 10 years, the amount that you will need to pay would be £73,301. It is possible that this could mean that there is insufficient equity in your home when the loan comes to be repaid. However, in most cases the loan provider will offer a no negative equity guarantee, so ensure you consider this when looking at your options.
In order to reduce the amount you have to pay some providers may allow you to take the loan in small "packages" instead of all at once. This will reduce the length of time that interest is charged, thus reducing the potential debt balance on repayment.
Some lifetime mortgage schemes will allow you to pay off the interest as you go along, this is known as an Interest Only Mortgage. This will the mean that there is less to pay upon your death or moving to long-term care, as you have paid the interest as you went along instead of waiting until the loan is repaid.
Of course neither option is without its upsides and downsides.
Pros of a lifetime mortgage
- The fixed interest rate prevents interest increasing out of control.
- You remain in your home, whilst enjoying the benefit of the funds tied up in it.
- You can take the money as lump sum or in monthly payments.
- Some interest roll-up mortgages offer a no negative equity guarantee, so you do not have to worry that there will be insufficient equity to repay the loan.
- You do not need to repay the loan until the end of the term, which is at death or if you move into longterm care.
- You may be able to reduce the inheritance tax due on your death by gifting money to your family, but you must take advice about this before you do so.
- Some schemes are inflexible if you encounter an unavoidable change in circumstances. For example you may need the provider's authority for someone else to move in, such as a relative or carer.
- Taking funds may affect your entitlement to benefits, so take advice before receiving any funds.
- There may be arrangement, valuation and solicitor fees to be paid.
- You may reduce the amount of inheritance you can pass to your beneficiaries on your death, and they may have to sell your home to repay the loan.
- If you wish to move to a smaller property you may be unable to transfer all of the loan to the new property.
- It may be difficult to pay the loan off early as an early payment charge may be incurred.
As with any financial decision of this nature you should always take independent advice from fully regulated and trained advisors before taking any final action but we hope that this article has given you some information to allow you to ask the right questions of your advisor, and understand their replies.
If you wish to discuss this please contact us to arrange a free and confidential discussion.
What have you always wanted to do, if only you had the time, and more importantly the money?
According to research most of us have a list of things that we would like to do before its too late, a “Bucket List
There are far flung worlds to conquer, dare devil activities to tick off and luxury items to acquire.
These are the top 10 according to the Prudential.
1. Experience the Northern Lights.
Perhaps an unexpected number one but 38% of over 55’s had this as a wish. The best place to experience the aurora borealis is on a winter break to Iceland or northern Scandinavia, according to travel experts.
2. Complete the family tree.
This is much easier nowadays with online database searches and DNA ancestry tests.
3. Drive Route 66.
The road that takes you from Chicago to California was the desire of 13 per cent of those surveyed, and is seen as the ideal backdrop for the classic American road trip from so many movies. So hire that convertible Mustang and head west.
4. Learn a new language.
You are never to old to learn a new skill, and it keeps your brain active which may actually stave off Alzheimer’s and dementia. Again, due to online facilities this has never been easier, so start today and get this one ticked off.
5. Eat at a Michelin Starred Restaurant.
There are over 150 restaurants with a Michelin Star in the UK and many see these as the height of dining.
6. Live in abroad.
Probably driven by a desire to escape the weather 10 per cent of us would like to live in another country. Experiencing new cultures and customs and making new friends, a perfect way to keep feeling young.
7. Take a trip on the Orient Express.
The star of many movies, from a time of elegance, refinement and a less hurried pace. Many of us would love to be pampered while the world passes by outside the window.
8. Swim with the dolphins.
Many of us wish to get up and close with these beautiful and intelligent mammals.
9. Visit (some of) the 7 wonders of the World.
We all know the name, but how many of us can name all 7. Which one would you tick off first?
10 . Retire
Finally, the most obvious thing to do at the end of a long working life is retire. Take some time off to just sit and relax with your loved ones, and plan the future.
I am sure you have 10 of your own that would love to achieve given the time and money. Please let us know in the comments section whether you agree with these 10 or what you would replace them with. Or can you name the 7 wonders (without Googling them).
