For many people, their home is their main asset. Most people, unless they are members of generous occupational pension schemes, don’t save enough for retirement. But property prices have continued to rise, and unlocking some of the value in your home could help provide a more comfortable retirement.
A lifetime mortgage is one option for releasing equity from your home. It is not for everyone, but if you are considering it, this guide could help you make an informed decision.
How Does a Lifetime Mortgage Work?
A lifetime mortgage is a type of equity release scheme which allows you to borrow against the value of your home. You can continue to live in the property when you take out a lifetime mortgage.
You will be able to borrow up to a set limit, which will depend on the value of your home. The lender will also apply an interest rate, which is usually fixed for the lifetime of the product.
Normally, you don’t make monthly repayments, but the interest accumulates until the property is sold and the loan is repaid. Normally, this is when the borrower dies or moves into residential care.
Many lenders include a guarantee against negative equity. This means that if the property is sold for less than the outstanding loan, you (or your beneficiaries) won’t need to find the extra money to repay it in full.
Some schemes allow you to safeguard a proportion of your property’s value to pass on to your beneficiaries.
You need to be at least 55 to take out a lifetime mortgage. Most lenders also apply a maximum age.
You can only arrange a lifetime mortgage on your main residence. Second homes and rental properties are not eligible. You may also be excluded if you live in a listed building, a shared ownership property, or sheltered housing. It might also be difficult to borrow if your home is attached to commercial premises. If you move, you may be able to keep the mortgage in place. However, you may need to repay it if the new property doesn’t meet the lender’s criteria.
Lifetime mortgages should not be confused with home reversion plans. While they work in a similar way, a home reversion plan requires you to sell your home to the lender. This is generally less flexible than a lifetime mortgage.
What Are the Benefits?
There are a number of benefits to taking out a lifetime mortgage:
- It can offer a lump sum to help with the cost of living in retirement.
- It offers an alternative to downsizing without the upheaval of moving.
- You will still own your home and can benefit if it rises in value.
- Unlike with a conventional mortgage or loan, your monthly bills won’t increase.
- The money you borrow doesn’t come with tax implications.
- Most lenders offer flexibility to borrow more (up to specified limits) or make early repayments under certain conditions.
- You still have the option to pass on some of the value to your loved ones.
What Are the Risks?
As with any financial product, there are some risks involved:
- There are cost implications when you set up a lifetime mortgage and you may need a survey on your property.
- The interest will accumulate and the amount repayable is likely to be significantly more than you borrowed.
- It will reduce the amount that you can leave to your beneficiaries in your will.
- It could complicate things if you decide to move house or downsize.
- It is expected that the property will be sold if you move into residential care. This may put pressure on your family to sell your home at what may already be a stressful time.
- When the property is sold, the loan needs to be repaid, including interest. This could mean that there is not enough left over to pay care fees.
- If you repay the loan early, there may be early repayment charges.
- If you have cash in the bank over a certain value, this can affect any means-tested state benefits you receive.
Who Can Benefit from a Lifetime Mortgage?
A lifetime mortgage may work for you if:
- Your home is your main asset and you would like to unlock some of the value.
- You do not want to move house.
- You do not have significant savings, investments, or pension funds, or you would prefer not to dip into them for any reason. There are tax benefits to holding certain investments (pensions in particular) and tax may apply when you withdraw money. However, this must be weighed up with the interest payable if you opt for a lifetime mortgage instead.
- You are not concerned about passing on your home to your beneficiaries.
- You are comfortable with reducing the amount available to pass on, and with adding debt to your estate.
Advice is strongly recommended if you are considering a lifetime mortgage, or if you just want to discuss your options in general. Consumers who are seeking equity release are more likely to be considered ‘vulnerable’ by financial service providers – this may mean they are in financial difficulty, are not financially experienced, or perhaps they have had a recent change in circumstances, such as a bereavement. Age alone does not mean that a customer is vulnerable, but as these products are aimed at older people, there is a higher risk that they may have health issues or need help to make major decisions.
An adviser should take time to understand your situation and explain your options clearly. You should be given plenty of time to make your decision and encouraged to discuss it with your family.
Please don’t hesitate to contact a member of the team to find out more about lifetime mortgages and retirement planning.
Think carefully before securing additional debts against your home. If you are thinking of consolidating existing borrowing you should be aware that you may be extending the terms of the debt and increasing the total amount that you repay.
The content in this article was correct on 07/11/2022.
You should not rely on this article to make important financial decisions. Teachers Financial Planning offers independent financial advice on savings, pensions, investments, mortgages and mortgages for teachers and non-teachers. Please use the contact form below to arrange an informal chat with an adviser and see how we can help you.