An Introduction to Lifetime Mortgages

A lifetime mortgage is a type of loan that is available against the security of their home to people who are at least 55 years’ old. With a lifetime mortgage, you can borrow against the value of your home without having to make any monthly mortgage payments. Instead, the loan and the compound interest on it can be paid back from the proceeds of the sale of your home when you move into long term care or die. This is a different arrangement from a regular mortgage where you make monthly mortgage payments such that the loan and the interest on it are fully paid off by the end of the mortgage term.

Many older people use lifetime mortgages to get extra money in retirement. Some people use it to pay off debts. Others use it to make their home more comfortable. Yet others use the money to help their family. It is important to understand how a lifetime mortgage works before you decide to get one.

Understanding Lifetime Mortgages

A lifetime mortgage is a loan that is secured against your home. This means that your home is used as a guarantee for the loan. The amount of money you can borrow depends on the value of your home and your age. With a lifetime mortgage, you do not have to make any payments until you move into long term care or die. This also means that the amount you originally borrowed gets bigger, over time, as the interest that accrues is added to the outstanding mortgage balance and interest in the next period then accrues on the larger amount. This process repeats itself until the mortgage is repaid from the proceeds of the sale of your home when you move into long term care or die.

Lifetime mortgages are popular with older people because you do not have to sell your home to get the money you need and you do not need to make any mortgage payments while you are living in your home.

Types of Lifetime Mortgages

1. Lifetime Mortgage

How It Works

A standard “lifetime mortgage” is the most common type of lifetime mortgage. With this option, you borrow a lump sum upfront or receive regular payments from your lender over a period of time. You do not need to make any monthly mortgage payments. The interest is rolled up into the amount you owe, which means the total debt increases as interest is compounded.

Example

Let us say you take out a lifetime mortgage for £50,000, with an interest rate of 5% and with annual compounding applicable. In the first year, the accrued interest would be £50,000 x 5% = £2,500. This would be added to your loan balance at the end of the year. So, at the end of the first year you would owe an increased amount, £52,500 (£50,000 + £2,500). In the second year, interest would be calculated on the new balance of £52,500, so it would be £52,000 x 5% = £2,625 and the amount you would owe would increase to £55,125 (£52,500 + £2,625) at the end of that year and so on. The longer the loan is held, the more the debt will grow.

Key Considerations

• No Monthly Payments: You do not have to make any payments during the life of the mortgage, which is beneficial if your income is limited or you do not want monthly outgoings.

• Compounding Interest: Because interest is added to the loan balance, the amount you owe grows over time.

• Impact on Inheritance: Since the loan amount grows, over time, it can significantly reduce the value of your estate when the property is sold. This could affect how much you leave to your heirs.

Who It Suits

A standard lifetime mortgage is suitable for people who need access to cash in retirement without the burden of monthly payments. It is often chosen by those who wish to remain in their home until they move into long term care or die and are not overly concerned about leaving a large inheritance.

2. Interest-Only Lifetime Mortgage

How It Works

With an interest-only lifetime mortgage, you borrow a lump sum from the lender, just like with a standard mortgage, but the key difference is that you only make monthly payments to cover the interest. By doing this, the capital amount you owe does not increase over time, because you are preventing the interest from being added to the loan balance.

Example

If you take out an interest-only lifetime mortgage for £50,000 with an interest rate of 5%, you would pay £208.33 each month to cover the interest (5% of £50,000 divided by 12 months). As long as you keep making the interest payments, the loan amount you owe remains constant at £50,000. When the property is eventually sold, the £50,000 is repaid from the sale proceeds.

Key Considerations:

• Monthly Payments: You must make regular interest payments. This option is potentially suitable if you have enough of a stable income in retirement.

• Loan Amount Remains Constant: Since you are paying the interest on an ongoing basis, the amount you owe does not increase, preserving more equity in your home for your estate or future needs.

• Flexibility: Some lenders allow you to stop making interest payments if your financial situation changes. This would then convert the mortgage to a standard lifetime mortgage, where interest accumulates on the loan.

Who It Suits

An interest-only lifetime mortgage is suitable for people who have sufficient income to cover the interest payments and want to avoid increasing their debt. This option is often preferred by those who want to ensure that more of the property's value remains intact for inheritance purposes and can afford the interest payments.

Additional Features and Variations

In addition to the two main types of lifetime mortgage, some lenders offer features or variations to suit different needs:

• Drawdown Lifetime Mortgage: This is a variant of the standard lifetime mortgage where you can draw smaller amounts as needed from an agreed limit instead of taking the entire loan amount as an upfront lump sum. Interest is only charged on the amounts you draw, which can help manage the compounding effect.

• Inheritance Protection: Some lifetime mortgages allow you to protect a portion of your property’s value to ensure that you leave something behind for your heirs. This might reduce the amount you can borrow, but it guarantees that a certain percentage of the home’s value remains for your beneficiaries.

• Fixed vs. Variable Interest Rates: Lifetime mortgages typically come with fixed interest rates, meaning the rate will not change over the life of the loan. However, some may offer variable rates, which can go up or down over time, affecting how much you owe.

• Portability: Some lifetime mortgages are portable, meaning you can transfer the mortgage to a new property if you decide to move, provided that the new property meets the lender's criteria.

• Flexible Lifetime Mortgage: A flexible lifetime mortgage may allow for optional repayments. You can choose to repay some of the interest or even part of the loan amount, which can help reduce the overall debt.

• Home Reversion Plans: Although not a lifetime mortgage, a home reversion plan is another form of equity release. In this arrangement, you sell part or all of your home to a reversion company in exchange for a lump sum or regular payments. You can live in the home rent free or for a nominal rent until you die or move into long term care.

Choosing the Right Lifetime Mortgage

Choosing between a standard and interest-only lifetime mortgage depends on your financial situation, needs and goals. A standard lifetime mortgage might be better if you need maximum cash without immediate financial obligations. However, an interest-only lifetime mortgage could be more suitable if you can manage monthly payments and want to preserve more of your home’s value.

Things to Consider with Lifetime Mortgages

There are a few things you should think about before you take out a lifetime mortgage. First, you should think about how it will affect your family. When you take out a lifetime mortgage, the loan is paid back when your home is sold. This means that there might be less money to leave to your family when you die. If this is important to you, you should talk to your family before you make a decision.

You should also consider how the loan interest will build up over time. Because you are not making any monthly mortgage payments, the amount you owe will get bigger every year. This means that the loan could end up being much larger than the amount you borrowed.

Getting advice before you take out a lifetime mortgage is essential. A financial advisor can help you understand how it will affect your finances. They can also help you find the best deal.

Conclusion

A lifetime mortgage can be a good way to get extra money in retirement. It allows you to unlock the value of your home without having to move out. But it is important to understand how it works. If you are thinking about taking out a lifetime mortgage, make sure you get advice. This will help you understand the pros and cons and find the best deal. A lifetime mortgage can make your retirement more comfortable, but it is important to make sure it is the right choice for you.

Sources:

What is a lifetime mortgage? | Lloyds Bank.

lifetime mortgage | FCA.org