If you live in the UK, you may have seen what seems to be the constant stream of advertising for Equity Release or Lifetime mortgages and wondering what is a lifetime mortgage? If you are over 55 these adverts may be appealing to you because there are a lot of people who are considering a lifetime mortgage because it is a secured loan that you do not have to repay in your lifetime. This type of mortgage is able to free up the equity that you have in your home while allowing you to still live in the property. However, before you commit to this type of mortgage, you should find out more about how it works, the types you can get and if it is actually right for your needs.
How Does The Lifetime Mortgage Work?
A lifetime mortgage is a secured loan which is taken against your home while you retain ownership of it. The loan can only be taken against a house which is your primary residence. When you take out a lifetime mortgage, you will have the option to ring-fence some of the value of the property to leave as an inheritance to your family. There are also some mortgage providers which offer larger sums to people with certain medical conditions or lifestyle factors such as smoking.
The lifetime mortgage will still have interest on the loan. This interest can either be paid off or add to the total amount of the loan. To repay the loan amount, the house will be sold and the funds from the sale used to pay off the loan. This will only occur when you pass on or move into long-term care.
If there are funds from the sale of the house left after the mortgage is settled, this will be given to your beneficiaries. The house does not always have to be sold to pay off the mortgage. If your estate is able to pay off the mortgage without selling the house, this can be done and the house will go to the beneficiaries.
However, if the sale of the house does not cover the full amount of the mortgage, your beneficiaries will be liable. They will need to repay any of the loan which is still outstanding after the sale of the property. To guard against this, most loan providers will offer a no-negative-equity guarantee. This is a promise by the lender to you and your beneficiaries that more than the value of the house will not have to be repaid.
The Types Of Lifetime Mortgages
Understanding how the lifetime mortgage works is important, but you also need to know the different types that you are able to get. There are 2 types of lifetime mortgage that you can get and they are the interest roll-up mortgage and the interest-paying mortgage. The primary difference between these mortgages is the way that the interest is handled.
With an interest roll-up mortgage, you will get either a lump sum or a regular payment from the loan provider. The interest that is charged on the loan will be added to the total amount of the loan so you will not have to make any repayments. The amount you have borrowed, along with the interest, will be repaid at the end of the mortgage term through the sale of your house.
With an interest-paying mortgage, you will get a lump sum, monthly or ad-hoc payments from the loan provider. This will reduce or stop the impact of the interest and some plans allow you to pay off capital if you want to. The amount that you have borrowed will then be repaid at the end of the loan term when your home is sold.
Should You Get A Lump Sum Or Regular Income?
When you take out a lifetime mortgage, you have the option of different ways of getting the money. You can choose to have the funds paid as a lump sum at the start of the loan period. You can also choose to have an initial smaller loan amount with an option of a drawdown.
The drawdown or flexible option is suitable if you want to take occasional or regular small amounts from the loan. This could be done to top up your income when you need to. In these cases, you will not be taking a single large loan and you will only have to pay interest in the money that you actually use and need.
Is A Lifetime Mortgage Right For You?
Your age and personal circumstances will play a large role in determining if a lifetime mortgage is right for you or not. When you are considering this, there are a number of factors that you need to look at. These factors will provide you with a better idea as to the suitability of this mortgage to your needs.
One of the factors to consider is how the lifetime mortgage will affect what you leave as an inheritance to your beneficiaries. The mortgage will often result in the sale of your home and this will reduce what you are able to leave your loved ones. If the house has sentimental value for your family, you need to carefully consider what you are doing.
Another factor to consider is that an interest roll-up mortgage can grow quickly. This means that you will eventually owe more to the lender than the value of your home. Unless you have a no-negative-equity guarantee, this could be trouble for your beneficiaries. If you are being offered a mortgage without this guarantee, you need to be careful.
This mortgage can affect your tax position and entitlement to any means-tested benefits. If you are receiving these types of benefits, you could lose them when you take the mortgage because you will have more equity in your bank. This can be a major issue for certain people such as those who receive tax credits.
The final factor to consider is that the lender will expect you to keep your home in good condition. You may have to set aside some money to do this. If you feel that this will be a problem for you, you might want to reconsider the use of a lifetime mortgage as it will not be suitable.
Who To Speak To For Advice
As we mentioned at the beginning of the article, there are countless adverts on TV and in the national press within the UK, promoting equity release and lifetime mortgages, but who should you speak to to gain quality advise?
The first thing you must ensure, is that whoever it is you speak to, they are authorised and regulated by the Financial Conduct Authority. Secondly you want to make certain that they promote the fact that if you have any issue or are not satisfied with the service they provided you, you can complain to the Financial Ombudsman Service who will deal with your complaint in a fair and unbiased manner.
A Word of Warning – We have looked at a number of these well known Equity Release companies and found that many of them charge fees that are added to your mortgage release. You need to make sure that you are dealing with a company that does not charge you advice fees at all.
Do All Companies Charge Advice Fees?: We found one company in our search online who doesn’t charge any advice fees, and they also suggest that you can save a minimum of £1295 as a result, compared to using other companies. The company is called Your Time Equity Release Ltd, they are authorised and regulated by the Financial Conduct Authority as well as signed up to the Financial Ombudsman Service. You can use their free equity release calculator to find out exactly how much equity you will be able to release, without any obligation. What is also impressive with this company is they do not have any sales staff, so no home visits. You can request from them the relevant information and get to take your time over your decision.