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Lifetime mortgages

Lifetime mortgages

What is a lifetime mortgage?

Lifetime Mortgages as the name implies are mortgages which last through the lifetime of the borrower. This means until you die, go into long term care or chose to sell the home the mortgage does not need to be repaid.

Lifetime mortgages are good as they free up equity in your home.

Lifetime mortgages are a type of equity release scheme.

How do Lifetime mortgages work?

Lifetime mortgages are just like normal mortgages. You will need to go through the same mortgage affordability process to determine if you can keep up on your monthly mortgage repayments if you chose to have them.

The lifetime mortgage is secured against your main residential property. You can choose to get a mortgage on all the equity in your property or just some of it.

This means you can leave some of the equity in your property in your will as an inheritance.

You will also be able to take money out of your property in a similar fashion as an equity release scheme.

When you take out a lifetime mortgage, interest is charged on the capital which you have borrowed.You can chose to pay this interest over the term of the mortgage or add it to the mortgage to be paid at the end of the term.

At the end of the mortgage term the property is sold and the mortgage lender takes their share of the proceeds while the rest are left for you (the part which you can add in your inheritance).The property does not have to be sold once you have died, your estate can choose to purchase the mortgage lenders share in the property and keep the property.

In a scenario where the property value has fallen and upon your death you are in negative equity then your estate will have to cover the difference between what the mortgage lender is owed and how much they generated from selling the property. In most cases you can simply get a no negative equity guarantee.

With a no negative equity guarantee the lender acknowledges that you (or your estate) will never have to pay back more than the value of your home upon the end of the mortgage term. This means that if your property value falls below the price of the mortgage you will be fine.

You can find a mortgage adviser with an equity release qualification (life time mortgages fit underneath this category) on the Equity Release Council member directory.

What do lifetime mortgages cost

Lifetime mortgages have a similar cost structure to a standard mortgage.

When taking out a lifetime mortgage you should expect to pay:

  • Legal fees
  • Mortgage valuation fees
  • Mortgage arrangement fee
  • mortgage booking fee
  • A mortgage completion fee
  • Home insurance

Types of Lifetime mortgages

There are two different types of lifetime mortgages.

An interest-paying mortgage:

With this option you take out a mortgage or extract a lump sum through the equity in your home and you make only the monthly interest repayments on the mortgage.

You can also make capital repayments on an ad hoc basis. Making capital repayments will reduce the amount of interest being charged on the capital you owe as that capital is being reduced. The capital outstanding is then paid off at the end of your mortgage term by selling your home or by your beneficiaries or estate making the outstanding capital payment to the mortgage lender.

An interest roll-up mortgage

With this mortgage you can either get a lump sum mortgage through the equity in your home or you can use the lump sum lifetime mortgage to replace an existing mortgage. You can also be paid a regular amount over the term of your mortgage rather than a lump sum. With this method you don't make any monthly mortgage repayments but instead the interest you owe plus the capital is rolled up and paid at the end of the mortgage term upon your death or if you chose to sell the home prior.

An alternative to the lifetime mortgage is the retirement interest-only mortgage.

Should you take a lump sum or get regular payments?

I guess this is the next logical question as you have both options (a lump sum or a regular income) available to you with the lifetime mortgage. The option you choose is totally up to you.

What you should consider is that when you take a lump sum payment you will be paying interest on that capital fromm the moment you take out that lump sum, so if you don't need all of it at once it is better to take a regular payment.

You may also have some income tax liabilities by taking out a lump sum.

Should you get a lifetime mortgage?

Lifetime mortgages are usually a good bet when you are in retirement.

They relieve you of the financial burden of mortgage payments and provide some income which you can use to supplement your pension

What should you consider when choosing a lifetime mortgage?

  • If you plan on leaving an inheritance then you should consider locking away some of your equity in your property rather than taking out a full lifetime mortgage on the whole property.

  • You should also consider if you will be able to transfer your mortgage to a new property if you want to move homes. Ask your mortgage lender.

  • You should ask the lender what happens if you die soon after taking the scheme to ensure you will be able to leave something for your family to inherit.

  • Your age will play a big factor. If you are below 55 then it is unlikely you will be considered for the lifetime mortgage.

  • As interests build up with the interest roll up lifetime mortgage you can find yourself owing way more than the property is worth. This means you have negative equity. The only way to get around this is by having a no negative equity guarantee from the mortgage lender.

  • The income generated through the lifetime mortgage might impact your eleigiblity for a means tested benefit

  • If you have a variable rate mortgage then there is a risk that your monthly mortgage repayments can rise to an unaffordable level. The only way to prevent this is if the rise in interest rates are capped in a similar way capped rate mortgages are structured.The equity release council standards insists that if there is a variable rate mortgage it must have a maximum cap.

  • You consider what early repayment fees are included in the lifetime mortgage.

  • A lifetime mortgage may also affect your income tax position.

  • It will also be your responsibility to keep your home in a good standard. This means you will have to put money away for regular repairs and upkeep.

  • You should ask your mortgage lender if you will qualify for a grant to help with home upkeep and repairs.

You can find FCA registered financial advisers who specialise in retirement planning in the money advice services Retirement adviser directory.

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