What is a lifetime mortgage?
A lifetime mortgage is a popular form of equity release that enables you to gain access to the funds tied up in your home. It’s a long-term loan which is secured against your property and does not need to be repaid until you die or go into full-time care.
With a lifetime mortgage, you will still retain ownership of your home and should continue to use the property as your main residence. This is different to a home reversion plan, which is another type of equity release where you sell all or part of your home to release the funds and remain living in it as a tenant.
With a lifetime mortgage, your house will be sold when you die or go into full-time care, paying off the debt in full.
How much can you borrow?
The amount you can borrow through a lifetime mortgage depends on your individual circumstances, including your age, your financial situation and the value of your property. Lifetime mortgages are generally only available to people who are 55 or over.
Types of lifetime mortgages
Upon receiving loan approval, your lender can release the money to you in either one lump sum, as a regular income, or as a combination of both.
In terms of the loan interest, there are different options available on how you can pay this back to the lender:
- Interest roll-up mortgage – The interest gets charged directly on to the loan amount. The advantage of this option is that you don’t have to make regular payments to pay back the interest.
- Interest paying mortgage – You receive your loan amount and then pay back the interest in monthly or ad-hoc payments. This allows you to initially receive the full loan value.
Repayments and interest rates
A lifetime mortgage doesn’t require monthly payments as a regular mortgage does. Instead, interest is added onto the total cost of the loan, factoring in the interest that has already accumulated. For this reason, the interest rate is likely to be considerably higher when you compare to other mortgage types.
Some of the costs that you might have to pay when taking out a lifetime mortgage include;
- Buildings insurance
- Legal and valuation fees
- Advisory fees
- Completion fees
There might also be extra charges if you choose to pay off your loan early on, known as ‘early repayment charges’.
Lifetime mortgage considerations
Before applying for a lifetime mortgage or any other type of equity release, you should consider the pros and cons:
Benefits to a lifetime mortgage:
- You can quickly access to your funds – typically within 12 weeks of applying for your loan.
- The house still belongs to you (unlike with a home reversion plan)
- You can safeguard a portion of your property value to gift to relatives in your inheritance.
Some things you should be aware of:
- It will still affect what you leave as inheritance even if you ring-fence some of the equity.
- It might affect your tax position.
- The interest is typically a lot higher than other loan types.
Most lifetime mortgage providers offer a no-negative-equity guarantee. This is put in place to ensure that your beneficiaries won’t have to pay any remaining costs if there’s not enough left in the sale of the property. This is still the case even if the debt is larger than the total house value.
Steps before taking out a lifetime mortgage
Releasing equity from your home is a big step for anyone and is not a decision you should make quickly or by yourself. Taking out a lifetime mortgage requires planning and discussions with your family beforehand.
You should also consider alternative loan options before deciding on a lifetime mortgage. Any type of equity release is a huge commitment to make and it’s possible that there are other loans that are more suitable for you.
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Why Clever Mortgages?
At Clever Mortgages we can offer you the support and advice required to ensure you get the right mortgage for your first home. We provide access to a comprehensive range of mortgages from across the market. We are also authorised and regulated by the Financial Conduct Authority (FCA) and adhere to the Treating Customers Fairly (TCF) guidelines, so you can be confident that we will treat you with integrity and only recommend products that meet your needs.
A fixed rate mortgage is where your interest rate stays the same for a set time period (usually between 2-10 years). As a result your repayments are exactly the same each month, regardless of what happens to other mortgage rates. These types of mortgages are popular with first time buyers and people looking to budget each month, especially those who have suffered from a poor credit history.
The main downside to a fixed rate mortgage is that if mortgage rates go down you can be paying a higher amount than you would on a variable rate mortgage. However, this can also go in your favour and if interest rates increase you can be paying less than you would on a variable rate.
Every lender will have their own standard variable rate (SVR), which is considered their basic mortgage. This interest rate goes up and down, usually in line with the Bank of England’s interest rates but the lender is free to raise this at any time.
This means that your monthly payments can go up or down depending on what the interest rate is at a given time. Some months you could be paying more whilst other months you could be paying much less.
A discount mortgage is when a reduction is applied to the lenders Standard Variable Rate (SVR) for a certain length of time (typically 2-3 years). Discount mortgages are attractive as they can allow you to pay slightly less than the bank's standard rate. However as the SVR can still fluctuate they are not ideal for people who are looking to stick to a strict long term budget.
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