Is a lifetime mortgage right for you?

The number of new equity release plans hit record highs in the third quarter of 2022, with the Equity Release Council (ERC) noting a 32% jump in enquiries compared to the previous year.

A lifetime mortgage is one type of equity release product that has grown in popularity in recent years. Despite their rising popularity, though, the loans may not be suitable for everyone. Read on to learn more about how they work and the pros and cons you should consider.

A lifetime mortgage releases tax-free cash from the equity in your home

A lifetime mortgage allows you to convert some of the equity in your home into tax-free cash while still retaining ownership.

Although interest is charged on them, unlike residential mortgages, you do not need to repay the loan or the interest until you either move into long-term care or pass away – hence the name “lifetime” mortgage.

Even though the interest accrues over time, ERC-approved products have a “no negative equity guarantee”, which means that the total amount you repay will never exceed the value of your home.

You can also repay some of the interest or loan on a monthly basis to reduce the overall amount owed.

To be eligible for a lifetime mortgage, you must be over 55, own your home, and be a UK resident.

The amount of equity you can release will depend on the value of your home, your age, your health, and whether you are applying for a single or joint mortgage. We can create a personalised illustration of what you could borrow.

Since a lifetime mortgage will affect how much you can leave to beneficiaries in your will, it’s a good idea to discuss the decision with your family.

Money from your lifetime mortgage could help you achieve your financial goals

A lifetime mortgage can be paid to you as one lump sum or in a series of smaller lump sums over time. If you choose the latter option, interest will be charged based on the rates when you receive each lump sum.

There are no restrictions on what you can use your lifetime mortgage for.

You could use the cash to:

• Fund home improvements

• Help your children or grandchildren buy their first home

• Pay for a once-in-a-lifetime holiday

• Repay an interest-only mortgage

• Clear existing debts.

If clearing debts is your priority, remember that the interest accrued on a lifetime mortgage might make this an expensive way to do that. We can help you explore all options for debt consolidation before you decide on a lifetime mortgage.

What are the pros and cons of equity release?

Benefits of lifetime mortgages:

• Allows you to access tax-free cash without having to move house

• You retain ownership of your home

• No monthly payments required.

Disadvantages of lifetime mortgages:

• Interest is charged on the original loan you take out, as well as the interest that has been added, so the total that you owe will grow over time

• Taking equity from your home means you may have less to leave to beneficiaries in your will

• The interest rates on lifetime mortgages tend to be higher than those on traditional residential mortgages.

There are additional costs to be aware of when taking out a lifetime mortgage, too. Legal and financial adviser fees, as well as valuation and completion fees, are fairly standard. There may also be an early redemption fee if you pay off the loan early.

What if a lifetime mortgage isn’t right for you?

Taking out a lifetime mortgage can have emotional as well as financial implications. Repaying the loan might require your property to be sold after you die, which might upset some family members if they had hoped to keep your home in the family. This is another reason to involve your family in the decision-making process and to think carefully before going ahead.

If a lifetime mortgage isn’t the right option for you, there are several alternatives you could consider.

For example, you could consider downsizing. By moving into a smaller house, you could free up cash from the equity of your home without taking out a loan. Alternatively, if you have other savings or investments, it might be more appropriate to use these instead.

Get in touch

If you’d like to learn more about whether a lifetime mortgage is right for you, we can help. We will review your circumstances to establish what is right for you, whether that be a Lifetime Mortgage or something else entirely. Please get in touch to arrange a time to chat.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen

Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.

A Lifetime Mortgage is not suitable for everyone and may affect your entitlement to means tested benefits, so it is important to seek financial advice before taking any action. If you are considering releasing equity from your home, you should consider all options available before equity release.

The interest that may be accrued over the long term with a Lifetime Mortgage, may mean it is not the cheapest solution. As interest is charged on both the original loan and the interest that has been added, the amount you owe will increase over time, reducing the equity left in your home and the value of any inheritance, potentially to nothing.

Although the final decision is yours, you are encouraged to discuss your plans with your family and beneficiaries, as a Lifetime Mortgage could have an impact on any potential inheritance. We would also encourage you to invite them to join any meetings with your Financial Adviser so they can ask questions and join in the decision, as we believe it is better to discuss your decision with them before you go ahead.

Approved by The Openwork Partnership on 18/05/2023