Essential Considerations Before Committing to a Lifetime Mortgage

Choosing to release some or all the equity in your home can be a daunting yet exciting opportunity. It can help finance things that may have previously been unobtainable, assist your family members through higher education, or simply give yourself a little cushion to fall back on throughout retirement.

It can put you at ease when times are a little more difficult. At the same time, it can be costly and cause difficulty with inheritance plans.

That’s why it pays to do research, speak to the experts, and learn about what the lifetime mortgage providers are offering. Some things may appear better than others, yet cause you financial hardship in the future. Others may see enticing interest rates offered but have specific caveats attached to them that you may not be aware of.

In this blog, we look at the key considerations around your lifetime mortgage options.

What is a lifetime mortgage?

Before we discuss the key aspects of a lifetime mortgage, let’s define one to ensure you are fully up to speed.

A lifetime mortgage allows you to access the funds you hold within your property as an interest-accruing loan. 

For example, if you own your home outright or a large percentage of it, you may be able to borrow a percentage of its value with the home being secured against the money you are borrowing. Rather than pay it back each month as if it were a regular mortgage, the funds are paid back to the lifetime mortgage provider upon the sale of the home once the homeowner dies or is moved into care.

Full ownership of the home remains yours throughout, making lifetime mortgages a popular form of releasing equity in your home. Perhaps one of the key aspects to remember, though, is that lifetime mortgages are only available to homeowners aged over 55 who either own the house outright or have only a small amount left on the mortgage.

How does a lifetime mortgage work?

In many cases, you will be able to borrow up to 60% of the property value, but this will depend on the lifetime mortgage provider you choose. There will be a pre-determined interest rate set by your lender. Some will offer “roll-up interest,” and others will offer “monthly interest” (we will cover these later).

Let’s use an example of how a lifetime mortgage will work:

You have a home worth £500,000 and you own it outright.

You take a lifetime mortgage for 10% of the value (£50,000) with an interest rate of 4%.

You either pay off the interest monthly or leave the interest payments until the house is sold.

After 20 years, you pass away or are moved into care, thereby forcing the house sale.

With the sale of the house, the loan of £50,000 is paid back alongside the interest.  After twenty years, this would have compounded quite considerably unless opting to take the monthly interest option.

Whatever is left after the sale can be split among your estate. In some cases, this could be very little or even nothing at all if the property’s value has dropped significantly and the interest has compounded. 

So, what should you take into consideration when looking at a lifetime mortgage?

Key things to consider before securing a lifetime mortgage

Before committing to a lifetime mortgage, it would be worth considering the following:

The amount you wish to borrow

You may see the opportunity to access a lump sum as beneficial to your short—or long-term goals, but you should also consider how it will later affect your finances and inheritance plans.

Look at your current needs, your future plans, and how releasing a large sum of equity could affect your family once you are gone.

The interest rate

Interest is inevitable, but you can shop around for preferable rates before committing to something that could prove to be extremely costly to your estate in the future. When interest compounds it can add significant extra value to the loan amount. 

Repayment options

Any form of financial commitment can be confusing, and it’s important to understand the repayment options available to you. Remember earlier when we talked about rolled-up and monthly interest?

Understanding these is important. With roll-up schemes, your interest is not paid back each month. Instead, it compounds throughout your lifetime mortgage. This frees up more cash now but means that when the property is sold, significantly more than what was borrowed will need to be paid back.

With a monthly interest option, you make payments each month towards the interest the loan accrues. This can be beneficial further down the line as the estate won’t be required to pay back as much money as the interest would have already been cleared.

This means you have less cash in your hand right now, as you have a monthly outgoing to cover, but more benefits for your family in the future.

Impact on inheritance

We have already mentioned this a few times, but it is perhaps one of the biggest factors to take into consideration, especially if you want to be able to leave a decent sum to family or friends.

Once you pass away or move into care, the property will be sold, and the loan will be repaid. If you have borrowed a significant sum or negative equity becomes a possibility, inheritance can be greatly reduced or become non-existent.

In some cases, this may not be an issue. Many people do not leave anything for others to inherit, preferring their cash to only benefit them in their lifetime.

Impact on benefits

If you are currently in receipt of benefits, a lifetime mortgage may be reduced or removed altogether. Your loan is seen as an extra source of income, and as a result, could see a new assessment of any benefits you claim.

It would be important to weigh up whether the loss of benefits and the addition of your loan puts you in a better or worse financial position.

Flexibility

When looking for a lifetime mortgage, investigate how flexible the deals are. Many offer you the chance to pay back a significant but capped sum each year, reducing the level of debt whilst avoiding early repayment penalties. 

Get advice

Finally, you should seek the expert advice of mortgage professionals before committing to anything. A lifetime mortgage provider or broker can offer advice and guidance on lifetime mortgage options that match your needs and align with your goals.