What is a Lifetime Mortgage & How Does it Work?

Over time, your pension pot may prove less flexible than you anticipated. Maybe care costs have taken a toll or maybe you want to help out your children with their house deposits. Lifetime mortgages enable older people to access extra tax free cash without giving up their home. Whatever you need the money for, it’s important to understand all the implications before you get started.

Hansford Bell is a team of financial life planners based in the South West. We’re dedicated to helping those in later life manage their wealth, plan for retirement, and reinforce that plan against the future.

In this blog, we explain everything you need to know about lifetime mortgages.

What is a Lifetime Mortgage?

A lifetime mortgage is a type of property-secured loan that is specifically designed for older people. It enables those in later life to unlock some of the wealth they have tied up in their home without having to downsize. People choose to take out a lifetime mortgage for a variety of reasons, but some common uses for this kind of loan include home renovations, care costs, large purchases and helping children or grandchildren buy their homes.

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How Does a Lifetime Mortgage Work?

A lifetime mortgage can enable you to access tax free cash without having to make any repayments during your lifetime. This can be taken out as a lump sum, a series of regular payments, or a combination of the two. You can also increase the amount you borrow over time until you reach the agreed maximum limit. Interest will roll up over this period, and though there’s no obligation to make monthly payments, you can choose to do so to keep this under control.

When you die or move into residential care, the loan will typically be repaid via the sale of your house. If you’re married, the loan won’t have to be repaid until the last remaining person in the home dies or moves into care. The amount you can borrow is typically between 20% and 45% of the value of your home, though this will depend on your age and the specific product you go for.

Many people considering lifetime mortgages are concerned about the implications for their estate. Whilst the value will inevitably fall, it is possible to protect some of the equity as inheritance. If you’re at all concerned, don’t hesitate to give our friendly team a call – we’ll provide you with all the advice you need to come to an informed decision.

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Who Qualifies for a Lifetime Mortgage?

This is a financial product designed for those in later life, so only people aged 55 and over are eligible. There are no upper age restrictions unless it is a variable rate lifetime mortgage, in which case the Equity Release Council set strict limits. You also must be looking to borrow a minimum of £10,000.

What is the Difference Between Equity Release & a Lifetime Mortgage?

Equity release is the name given to a range of financial products that those in later life can use to free up the cash they have tied up in property. Within equity release, there are two main categories of product: lifetime mortgages and home reversion plans.

Lifetime mortgages are the most popular option, due mainly to the fact that you retain full ownership of your home. A home reversion plan, on the other hand, means you effectively sell a portion of your home at below market value, though you can continue living there rent-free.

Learn more: How Does Equity Release Work?

What Happens at the End of a Lifetime Mortgage?

The term of a lifetime mortgage comes to an end when the borrower dies or enters long-term residential care. At this point, the full loan and accumulated interest will need to be repaid in full. The loan is typically cleared through the sale of the property, however this not obligatory.

Can I Sell a Property with a Lifetime Mortgage?

Even if you choose to take out a lifetime mortgage, you retain full ownership of your home. That means you’re free to move if you want to; most products are portable, allowing you to transfer them to a new property. However, the process can be a bit more complicated, and your lender may have specific criteria that mean certain properties are unacceptable.

Benefits of a Lifetime Mortgage.

Many people choose to release equity in later life as a way of accessing tax free cash. Here are some of the reasons why:

• Tax Free Cash – whether it’s a holiday, home improvements, a new business, or to fund care costs, the money you release can be used however you want.
• No Negative Equity – the Equity Release Council prohibits loans from increasing beyond the value of the property in question. That means, you will never owe more than your home.
• Fixed Interest Rates – though there are variable rate products, the vast majority have interest rates that are fixed for life.
• Flexibility – you can choose to release a lump sum or receive regular payments; it’s entirely down to you.
• Home Remains Yours – with a lifetime mortgage, you don’t have to downsize to access extra cash; you can stay at home for the rest of your life.

Drawbacks of a Lifetime Mortgage.

Despite its many benefits, a lifetime mortgage does come with certain implications. Below, we summarise the main ones you should consider.

• Reduces Value of Estate – any equity release product will impact the amount your loved ones can inherit. If you want to preserve your estate, this may not be for you.
• Higher Interest Rates – lifetime mortgages typically come with higher interest rates than standard residential products.
• Interest Roll Up – rolled up interest on an increasing sum can quickly add up, and the loan may grow much larger than you intended.

Equity Release may involve a Lifetime Mortgage or Home Reversion Plan. To fully understand the features and risks, please ask for a personalised illustration

Trusted Lifetime Mortgage Advisors Hansford Bell.

At Hansford Bell, we’re passionate about helping you plan and achieve the future you want.

If you think a lifetime mortgage might provide you with the added financial freedom you need, give us a call! Our friendly team will provide you with everything you need to make a confident and informed decision, and help you find the most suitable product on the market.

Note: This blog is for general information only and does not constitute advice. A lifetime mortgage is secured on property. A lifetime mortgage could impact on means tested state benefits.

Read next: Should You Pay Off Your Mortgage or Invest for Retirement?