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Lifetime Mortgages | A Down-to-Earth Guide
Retired homeowners can often feel financially frustrated. You’re sitting on a strong asset - your home - but the money is locked in it. Often, those in retirement are struggling on their pension, getting by but not enjoying their later years as much as they’d once hoped they would.
Needing to keep the security of your home, selling up to access that money is not an option - so how can you both keep your home and get the most out of the equity you’ve built up over the years? The answer is with a lifetime mortgage.
What is a lifetime mortgage and how does it work? Let our experts at Clifton Private Finance help with this down-to-Earth guide.
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What is a Lifetime Mortgage?
A lifetime mortgage is part of a range of products under the umbrella of equity release. It is designed to release the money locked into your home without you having to sell it and move out.
In some ways it seems too good to be true, so let’s look into the reality of a lifetime mortgage and how it can help you.
Why is it Called a Lifetime Mortgage?
The first step to understanding a lifetime mortgage is to look at the name itself. First, it is a mortgage, which is simply a term for any loan that is secured by your home. But what about the lifetime part?
A lifetime mortgage is paid off when you pass away. At this point, your house is sold and the debt is repaid in full.
All regulated lifetime mortgages come with a lifetime resident guarantee, which means you will never be asked to leave your house early or pay off the debt while you’re still living there. Your home remains your home for as long as you need it.
Lifetime Mortgages and Interest
So, what’s in it for the lender? They give you a nice big lump sum and they don’t even ask you to pay for it until you’ve passed away. It seems a little one-sided.
Because you never make a single payment on a lifetime mortgage until it is due, that interest will just keep growing. It’s also important to take note that the interest is due on the previous interest, known as compound interest. This means the amount that is eventually paid back will be more than the amount you borrowed - and that’s what’s in it for the lender; they get extra money in return for their patience.
It’s not all downside though. As property tends to rise in value as the years pass, experience shows that for the majority of homes, the value added over the years is typically more than the interest accrued on a lifetime mortgage. So while your estate will be paying back more than you borrowed, it’s not quite the hit that some try to make it out to be.
The Impact of a Lifetime Mortgage on Your Estate
Your estate is the term given to the things you leave behind for your heirs, also called beneficiaries. For many people, this is a great concern when considering a lifetime mortgage, so let’s take the time to look at it in full.
Leaving Your House for Your Family
If you are looking to leave your house intact for your family, then a lifetime mortgage is not for you. Under the terms of a lifetime mortgage, the property is sold upon your passing to pay back the debt, which would mean there’s no home there to give to your children or grandchildren.
In some cases, your family can choose to pay back the lifetime mortgage through other means, and this is often acceptable to the provider (after all, they just want their money), but this is like them effectively buying your house back, so feels a lot less like being left a house in your will, and a lot more like a responsibility.
The No Negative Equity Guarantee
One of the worries many people have is the idea that the value of the lifetime mortgage, once all the interest is added, will exceed the value of their house - leaving their heirs with a debt that must be repaid. It is important to emphasise that with regulated lenders this does not happen. All lenders who are members of the Equity Release Council (and you should avoid any who are not!) issue a no-negative equity guarantee that specifies that the maximum size of the loan, including all interest, cannot exceed the value of the property once sold.
Thankfully, this means there is no chance that you will saddle your beneficiaries with any debt.
Ringfencing
An additional layer of security lies with ringfencing, a term that means to create a metaphorical fence around a portion of the property value that cannot be touched by the lifetime mortgage.
Ringfencing part of your property is an excellent way to provide additional reassurance to your family, ensuring that no matter what happens, nor how long the mortgage grows, there will be something for them to take away.
Ringfencing will have an impact on the size of the lifetime mortgage you can obtain in the first place, for obvious reasons, but is a strong option for anyone concerned about their eventual estate.
The Balance of Property Value Increase
As mentioned earlier, one of the biggest factors that offsets the worry of a lifetime mortgage is the nature of the property market. Historically, property values have risen over time, exceeding inflation and the interest rates on loans - it’s one of the reasons so many people invest in property rather than leaving their money in a savings account.
When you consider this factor, it’s easy to understand that the impact made on your estate by a lifetime mortgage when it becomes due, is often less than expected.
Of course, calculating the figures can be complicated, so it’s worth discussing this aspect of a lifetime mortgage with your mortgage advisor. Clifton Private Finance’s dedicated equity release team are here to answer any questions - why not give us a call to talk about your specific situation?
It’s Your Money, Why Shouldn’t You Spend It?
One final consideration when thinking about your estate and what you leave for your family is a little more self-interested, but no less valid and justifiable. It’s the idea that it’s your money, why shouldn’t you spend it?
So often, parents and grandparents are worried that it is their responsibility to leave their property and valuables behind for the younger generations, and will put themselves through hardship to meet this pressured sense of duty. It is important to take a step back, remind yourself that this is your home and your money, and if you want to use that money while you are alive rather than leave it behind, then that’s perfectly acceptable.
Leaving something behind for your family is wonderful, but it should be a loving gift, not an obligation.
Lifetime Mortgages and Spouses
Like a traditional mortgage, a lifetime mortgage is tied to all the homeowners. This means if you bought your home with your spouse, they are equally part of the lifetime mortgage responsibilities. For married couples or those in a civil partnership, this is typically a good thing as it means that repayment of the mortgage is only due when the last surviving partner no longer needs the home.
However, relations, spouses, and any other tenants who are not part of the lifetime mortgage will not have the same right of lifetime tenancy. This can cause some potential problems that should be considered well in advance.
Lifetime mortgages can be changed to account for these situations, and contacting the provider when a life change occurs (such as later marriage) will enable the necessary alterations. Be aware, however, that this is likely to alter the terms of the mortgage and may incur fees or a change of interest rate.
Speak to a Clifton Private Finance advisor for help if you have any questions regarding the terms of your lifetime mortgage.
Lifetime Mortgages and Tax
Because a lifetime mortgage is a loan, there is no tax payment due. This means the amount of equity you release is completely yours to use in whatever way you wish (though note that under FCA regulations, loans cannot be used for gambling, to support illegal activities or to fund terrorism).
Additionally, lifetime mortgages can form part of an inheritance tax minimisation package, releasing money now to limit the inheritance tax paid at a later date.
Using a lifetime mortgage in this way requires specialist knowledge and careful planning, so it is essential you speak to an experienced professional advisor. Contact us today to discuss your options.
4 Alternatives to a Lifetime Mortgage
Lifetime mortgages are only one equity release product designed to release money locked up in your home. Other options include:
Similar to a lifetime mortgage, a drawdown mortgage provides a little more flexibility, with a staged release of money over time that reduces the overall interest accrued. If you are looking to use equity release to spread over your retirement, then a drawdown mortgage may be a preferable option to the lump sum provided by a lifetime mortgage.
A HELOC, or ‘Home Equity Line of Credit’ is an equity release product that acts as a high-value credit card leveraged against your home, rather than a lump sum loan. When properly managed, HELOCs can give you substantial flexibility over your equity and significantly lower the overall interest paid. Unlike a lifetime mortgage, HELOCs have the option for making repayments during their initial term, further empowering the borrower to minimise interest. HELOCs are a relatively new niche product in the UK, having been more common in the US for many years, and can only be obtained through a specialist lender.
A Retirement-Only Mortgage is an interest-only mortgage solution for those over 55, that serves as a bridge between a standard interest-only mortgage and a lifetime mortgage, with repayments in the early years to cover accrued interest, before potentially converting to a lifetime mortgage at a later date.
Rather than a loan to release the equity in your home, a home reversion plan involves selling off a portion of your home early while you retain the right to live in it for your lifetime. Home reversion plans may seem similar to lifetime mortgages at a first glance, but the finer nuances regarding property value gains and comparative interest of a lifetime mortgages mean home reversion plans are typically more costly than a basic lifetime mortgage.
The Pros and Cons of a Lifetime Mortgage
As with any financial product, a lifetime mortgage comes with advantages and disadvantages:
- PRO: Release money locked in your home to ease your retirement.
- PRO: Help family members today, rather than them having to wait until your death.
- PRO: No payments to be made in your lifetime.
- PRO: Secure life-long agreement to remain in your home.
- PRO: Preferable to selling up or downsizing for those with an attachment to the family home.
- PRO: Can be used as part of a comprehensive inheritance tax mitigation solution.
- PRO: No taxes to pay on the money.
- PRO: Strict regulation and oversight makes lifetime mortgages a trusted product in the UK.
- CON: Interest can be considerable and means your estate will pay back more than you borrowed.
- CON: Family will not be able to inherit the home to live in.
- CON: Residency guarantees do not extend to those who are not part of the lifetime mortgage agreement.
- CON: Other equity release products may be more suitable for your needs.
Obtaining a Lifetime Mortgage with Clifton Private Finance
Getting a lifetime mortgage is a significant financial decision and should not be taken lightly. It provides you with a substantial amount of cash in return for a watertight agreement that cannot easily be reversed.
Working with both a broker and a solicitor is advisable when looking for a lifetime mortgage. The broker will help you compare the various options available to you, explaining the finer nuances of the product, and work with your best interests at the forefront to obtain the best deal possible; the solicitor will look after your personal and financial interests, making sure you are making a full informed decision with a clear understanding of the process.
To learn more about how to take care of yourself when considering equity release, read our article How to Spot Equity Release Companies to Avoid.
Clifton Private Finance is a respected and trusted independent financial broker, and our trusted partners will work hand-in-hand with you to ensure you get the best possible deal and make all decisions with a clear understanding of the implications. They will help you through the application process, ensuring the entire undertaking is done smoothly and easily, and always with your needs prioritised.
For further information and to start the process of unlocking the value in your home, speak to Clifton Private Finance today.
