How can a lifetime mortgage benefit me?
A lifetime mortgage is when you borrow money secured against your home, provided it’s your main residence, while retaining ownership. Interest is charged on what you have borrowed, which can be repaid or added to the total loan amount. Also called equity release.
How is equity release paid when you use a lifetime mortgage?
You’ll have two options as to how you receive your money from the lifetime mortgage. It can be paid all in one go, or as a smaller initial amount with the option to receive additional
payments (drawdowns) later on. Choosing a single cash lump sum may suit your requirements, but you’ll be paying interest on the full loan amount from day one. This approach may also affect how much tax you pay and any means-tested benefits you receive.
What are the lending criteria for a lifetime mortgage?
A number of factors will affect your eligibility for a lifetime mortgage. Typically, you’ll need to be at least 55 years old, although in some cases it’s 60. If you’re submitting a joint application, the age of the youngest person will be used. The older you are the more you’re likely to be able to borrow, and having existing health conditions might also qualify you for a larger loan.
Some providers will require your home to be worth a certain amount, usually around £70,000 or more. They may also specify a minimum loan amount, often at least £10,000.
Benefits
- Great if your savings and other sources of income are not enough to meet your needs in retirement. For example, as you get older a lot of people require specialised care. Care costs are very expensive, and the biggest downside of moving into a care home is leaving the comfort of your home and having uncontested privacy. A lifetime mortgage is a good way of releasing equity to fund care at home. Also, another scenario is it can be used as an alternative option instead of downsizing.
Disadvantages
- Reduces family inheritance. You will end up repaying more than you borrowed, and with an interest roll-up mortgage, this amount could be far bigger. Your beneficiaries will therefore inherit less when you die.
- Receiving a lump sum in cash could also affect any means-tested support you’re currently entitled to.
- The cost of interest payments added to the loan may erode all the equity in the home depending on how long you live. That’s why the minimum age for a lifetime mortgage is 55.
Summary
In my opinion, there are better options for retirement planning if you start the process early enough. Effective planning like contributing to a pension scheme while working and taking out care-related insurance products might be better long term. Therefore I stress the importance of speaking to a financial advisor for the best advice for your situation.
Written by: Manjinder Badyal
Date: 14 October 2022
