Lifetime mortgage

The way a lifetime mortgage works is, you borrow a lump sum in the form of a mortgage, which is eventually repaid from the sale of your home either when you die or move into long-term care. The amount you can borrow is typically between 20 percent and 50 percent of the property’s total value – and usually the older you are, the more you can release.

The amount you owe will grow with interest over time, but you can sometimes reduce this by paying off the interest as you go, so it doesn’t compound (this is known as an ‘interest-paying mortgage’). If you choose not to pay off the interest as you go, you will have an ‘interest roll-up mortgage’. In this case, you will end up repaying more overall, as the interest will compound over time and therefore increases the total amount you will owe. 

Most equity release providers now offer a ‘no-negative-equity guarantee’, which means the mortgage will never be more than the sale value of your home the mortgage is secured against. However, this could still mean that all the property’s equity is used up in paying off the mortgage.

You may qualify for an enhanced lifetime mortgage if you have a serious health condition or an unhealthy habit, like smoking. This can enable you to borrow more or to pay lower interest. Your advisor will be able to assess the options available to you.

Important 

A Lifetime Mortgage will reduce the value of your estate and may affect your entitlement to means-tested benefits and tax status.  

The impact of not servicing monthly interest payments on a Lifetime Mortgage is that the outstanding debt can grow rapidly, thus reducing the value of your estate. 

For example, if the interest rate was 7% a year, a £50,000 loan would double to £100,000 after 10 years assuming no repayments are made.  

This is an example for illustrative purposes only and personalised advice and recommendations should be sought from a qualified professional. You are strongly advised to register a lasting power of attorney. This will allow your affairs to be managed by somebody else if your mental abilities significantly decline. 

The risks to consider with a lifetime mortgage

With a lifetime mortgage, unless you pay the interest as you go you will end up owing more than you original amount borrowed and when the time comes for the home to be sold – up to the total value of the property could be used up to repay the mortgage secured against; but not more than that.

This is because a lifetime mortgage (like a regular mortgage) charges compound interest. If you don’t pay off the interest at regular intervals, the entire sum will compound – so as an example-at around 5 percent interest, the amount you owe would double every 15 years. This is a good reason to be cautious of lifetime mortgages if you hope to leave a high level of inheritance for your family. Of course, the actual rate you pay may be less than this amount and the compounding effect is more relevant if you take out a lifetime mortgage at a younger age vs at a more advanced age. 

One way to reduce this risk is to pay off the interest as you go, either monthly or at regular intervals. Another option is to take out a series of smaller lifetime mortgages over the years. This way you will not be paying interest on the whole sum for the whole period of time, so the amount you end up owing will be less.

Can I end a lifetime mortgage early?

You may choose to end your lifetime mortgage earlier, but this can cost you. If you’ve simply had a change of mind, it’s important to speak to your mortgage broker as soon as possible to work out the most cost-effective way of re-organizing your equity release mortgage. Your mortgage advisor will go over all your short-term and long-term plans at the beginning of taking out your equity release mortgage to ensure all scenarios are factored in and considered. 

If you want to move home, you can keep your scheme running as normal. You’ll have to tell your equity release company so that they can decide if your new home is similar in value and if so you’ll likely be able to port (transfer~) your existing arrangement over to the new property.

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