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This post does not constitute financial advice.
If you’re over the age of 55, or have a loved one who is, you might’ve heard of lifetime mortgages before.
If you need a bit of extra cash, or want to have money to spend on your retirement, taking out a lifetime mortgage can be one way of getting what you need without having to give up your home. But this solution isn’t without its risks.
In this post, we’ll fill you in on what a lifetime mortgage actually is, who it’s best suited for, and some of the pros and cons to going down this route.
What is a Lifetime Mortgage?
When you take out a lifetime mortgage, you release some of the wealth (or equity) that makes up the value of your home. This is why you often see lifetime mortgages referred to as ‘equity release’.
The loan that you take out to secure the mortgage isn’t paid back until you die or move into long-term care. You still own your home throughout the process, and because of something called the ‘no-negative equity release guarantee‘, in most cases, you’ll never have to pay more than the value of your home.
What are the different types of lifetime mortgages?
There are two main types of lifetime mortgages: lump sum and drawdown.
Lump Sum
In a lump sum mortgage, you’ll get given the money all at once. You won’t need to make regular repayments, and interest is allowed to build up on the mortgage. Once the house is sold, the full sum of the money will be paid back – whatever is left over can go to the beneficiaries of your will, or be used to pay care costs.
Drawdown
In a drawdown mortgage, you get a smaller amount of money to start off. The remaining cash is kept in a special bank account, so you can use it later if you want to – hence the name ‘draw down’. Interest will only be charged on the money you’ve already taken. As with a lump sum mortgage, the amount you borrowed is repaid when your home is sold.
What are some pros and cons to getting a lifetime mortgage?
Pros
- Accessible – can be easier for older applicants to access; some lenders offer lifetime mortgages up until the age of 95
- No monthly repayments – though if you do make these repayments, it can mean your loved ones have more inheritance.
- Peace of mind – you can access the money without having to leave your home, and can use it for anything, from medical care to holidays.
Cons
- Decreased inheritance – taking equity out of your home via a loan means that there won’t be as much for your relatives to inherit as with a standard mortgage.
- Penalties – lifetime mortgages can have high early repayment charges, as the whole point of them is that interest is allowed to build up over time. This is on top of all the usual fees you’d find with a standard mortgage. These could add between £1500 and £3000 to your overall costs, according to Money Helper.
- Access to fewer benefits – the extra money you get from releasing equity from your home could mean you’re no longer eligible for benefits. This could include pension credit and council tax benefits.
Are there alternatives to lifetime mortgages?
Though a lifetime mortgage is one of the most popular forms of equity release, it’s not the only option available to older people.
Retirement interest-only mortgages function like equity release in that they’re only paid off when the homeowner dies or goes into care. Unlike equity release, only the interest is paid off each month – meaning only the loan itself is repaid later on. This could be a good option if you want to leave more behind for your heirs.
You could also look at downsizing to a smaller property, or remortgaging your current property.
A lifetime mortgage can help you live more comfortably in retirement but isn’t the right choice for everyone. If you do want to look into one, it’s best you get advice first.
Contact Finance Advice Centre today to find out more about your lifetime mortgage options.
