Lifetime mortgages

Lifetime mortgages provide an opportunity for older homeowners to get their hands on extra capital.

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A lifetime mortgage allows you to borrow money secured against your home. The loan is only paid back when all homeowners die or go into long-term care. At that point, your home is sold and the money from the sale is used to pay back the lender.

You can pay back the interest charged as it’s accrued or at the end of the term.

If you choose the latter, compound interest can make your debts grow quickly, but most lifetime mortgages offer a no-negative-equity guarantee.

Nevertheless, these products are likely to have a significant impact on the size of the inheritance you leave your heirs.

How does a lifetime mortgage work?

Lifetime mortgages are offered by equity release providers.

With most providers, you’ll usually have to be at least 55 years old to apply. Each provider will set a minimum amount you can borrow and a minimum value for the home you’re securing your loan against.

The maximum amount you can borrow will depend on a number of factors, including your age and financial circumstances. Older, wealthier applicants will be able to borrow more.

In a similar vein to annuities, you might even be able to get a better deal if you have health problems.

Most lifetime mortgages have a fixed rate of interest, although there are some variable-rate deals. You can choose to receive your money as a lump sum or in instalments. With the latter, you’ll only pay interest on what you borrow.

Any money left over after the home is sold will remain with the homeowners or their heirs.

Lifetime mortgages are portable, so it’s possible to move house, but the lender may intervene if your new house is more expensive than the equity remaining in your previous one.

It is possible to repay the loan before you die or go into care, but most lifetime mortgages come with hefty early repayment charges, so tread carefully before applying for one.

What’s the difference between a lifetime mortgage and a home reversion scheme?

A lifetime mortgage is typically described as a form of equity release. The other form is called a home reversion scheme.

With a home reversion scheme, an equity release company buys a share of your property. Learn more about a home reversion scheme.

It’ll pay well below market value, but you’ll get the money straight away and will be able to continue living there. For some, this might be a reasonable trade-off.

Once the property is sold, the company gets the same share of whatever your home sells for as repayment.

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Interest roll-up mortgage vs interest-paying mortgage

With an interest roll-up mortgage, your interest is added to the loan. You won’t make any repayments until the term ends, but it’ll cost you more in the long run due to compound interest. With an interest-paying mortgage, you’ll receive a lump sum and make monthly payments to clear the interest. Some deals may allow you to pay off the capital as well.

The advantages and disadvantages of a lifetime mortgage

Pros

  • Quick access to large sums of money.
  • No interest repayments until the term ends.
  • Protection from negative equity.
  • You’ll get a better deal if you’re older (or unhealthier).

Cons

  • An extremely costly loan.
  • Large early repayment penalties.
  • It may prevent you from moving house.
  • You could miss out on means-tested benefits, such as council tax benefit or pension benefit.
  • Your lender may require to keep your home well-maintained, costing you extra money.

The bottom line

A lifetime mortgage allows you to quickly get your hands on a large amount of cash, but it comes at a long-term cost that is difficult to undo due to the large early repayment charges. It’s recommended you weigh up your options with an accountant before jumping into one of these deals.

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