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With a lifetime mortgage, you take out a loan secured on your home which does not need to be repaid until you die or go into long-term care. It frees up some of the wealth you have tied up in your home and you can still continue to live there.
How does a lifetime mortgage work?
As with a conventional mortgage, a lifetime mortgage is when you borrow money secured against your home. The home still belongs to you. Interest is charged on what you have borrowed, which you either pay or, more typically, is added on to the total loan amount. When you die or move out, the home is sold and the money from the sale is used to pay off the loan. Anything left goes to your beneficiaries.
If there is not enough money left from the sale to pay off the loan, your beneficiaries would have to repay any extra above the value of your home from your estate. To guard against this, most lifetime mortgages offer a no-negative-equity guarantee. With this guarantee the lender promises that you (or your beneficiaries) will never have to pay back more than the value of your home – even if the debt has become larger than this.
Types of lifetime mortgages
There are different types with different costs. You can choose from:
- A roll-up mortgage. You get a lump sum or are paid a regular amount and are charged interest which is added to the loan. This means you don’t have to make any regular payments. The amount you originally borrowed, including the rolled-up interest, is normally repaid when your home is eventually sold.
- A fixed-repayment lifetime mortgage. You get a lump sum, but don’t have to pay any interest. Instead, the lump sum to eventually be repaid is agreed in advance and is higher than the lump sum raised. When the home is sold, you have to pay the lender the higher amount.
- An interest-only mortgage. You get a lump sum and pay a monthly interest on the loan, which can be fixed or variable, rather than allowing the interest to roll up. The amount you originally borrowed is normally repaid when your home is eventually sold.
Lump sum or income?
When taking out a lifetime mortgage, you can choose to borrow a lump sum at the start or an initial lower loan amount with the option of a drawdown facility. The
flexible or drawdown facility is suitable if you want to take regular or occasional small amounts, perhaps to top up your income, rather than one big loan, as it means you only pay interest on the money you actually need.
Is it right for you?
It depends on your age and circumstances. Here are some factors to consider.
- With a roll-up mortgage the total amount you owe can grow quickly. Eventually this might mean that you owe more than the value of your home, unless you have a no-negative-equity guarantee. Make sure your mortgage includes such a guarantee.
- A fixed-repayment mortgage becomes a better deal if you live much longer than the lender thinks you will. But if the home is sold much earlier than you planned, you will get a worse deal.
- An interest-only mortgage with variable interest rates may not be suitable, because the interest rate may rise faster than your income.
- It will affect what you leave as an inheritance.
- It may affect your tax position and entitlement to means-tested benefits.
Lenders will expect you to keep your home in good condition. You may need to set aside some money to do this. If this could be a problem, an equity release scheme may not be suitable for you.
What does it cost?
Make sure you are aware of all the costs before going ahead. You may have to pay:
- An arrangement fee to the lender for the product
- Legal fees and valuation fees
- Buildings insurance
- A fee to an adviser for their advice and helping you set up the scheme
These costs may add up to several hundred pounds. There may be extra costs for paying off your loan early.
Questions to ask your adviser when considering a lifetime mortgage
- How would the scheme affect your state or local authority benefits?
- What happens if you end up owing more than the home is worth? (Many providers now provide a no-negative equity guarantee.)
- What happens if you die soon after taking out the scheme?
- Can you transfer the scheme if you move home?
- What conditions does the scheme put on you when you carry on living in the home?
- Would you qualify for a grant to help you pay for home repairs or alterations?
- What fees are payable if you decide to repay the loan, say after three years?
You can find FCA registered financial advisers who specialise in retirement planning in our Retirement adviser directory .