Pro's & Con's of Equity Release Lifetime Mortgages
What are the pro’s and con’s of Equity Release Lifetime Mortgages? In this article we will look at some of the features, benefits and downside of Equity Release Lifetime Mortgages. We will be looking at the following areas:
- What Are Lifetime Mortgages?
- The Pros of Lifetime Mortgages
- The Cons of Lifetime Mortgages
- How to Determine if a Lifetime Mortgage Is Right for You
- Alternatives to Lifetime Mortgages
- Risks to Consider When Taking Out a Lifetime Mortgage
- Legal and Financial Considerations for Lifetime Mortgages
What Are Lifetime Mortgages?
A Lifetime Mortgage is a type of equity release product that allows homeowners to release some of the equity tied up in their property, without having to sell their home. It is a mortgage that is secured against your property and is typically repaid when the homeowner passes away or sells the property. It has to be a first charge against your property so if you already have a mortgage or loans secured on the property then these will need to be cleared using the Lifetime Mortgage funds
Here’s what you need to know about Lifetime Mortgages…
How Do Lifetime Mortgages Work?
With a Lifetime Mortgage, you can access a lump sum of money (tax free) while continuing to live in your home. The loan amount is based on the value of your home and your age, with older homeowners typically able to access a larger amount. The loan is secured against your property, and interest is charged on the loan amount. However, you don’t have to make any repayments while you’re alive, and the loan is only repaid when you pass away or move into permanent long term care.
What Are the Advantages of a Lifetime Mortgage?
The main advantage of a Lifetime Mortgage is that it allows you to access the equity tied up in your property, without having to sell your home or move out. It also gives you the option of not making any payments if you choose not to. This can be a useful way to supplement your income in retirement, pay off debts, or fund home improvements. Additionally, Lifetime Mortgages are typically available to homeowners over the age of 55, regardless of their income or credit history. This makes them a useful option for homeowners who may not be eligible for other types of loans.
What Are the Disadvantages of a Lifetime Mortgage?
The main disadvantage of a Lifetime Mortgage is that interest is charged on the loan amount, which can add up over time if you decide not to make any payments. Additionally, the loan amount and interest will be repaid when you pass away or go into long term care. This can impact the amount you’re able to leave to your beneficiaries. Additionally, if you choose to repay the loan early, you may be subject to early repayment fees. This area of advice is an important aspect to consider. A good adviser will make sure there are no surprises later on during the term of the Lifetime Mortgage.
What Are the Different Types of Lifetime Mortgages?
There are several different types of Lifetime Mortgages available, including:
Roll-up Lifetime Mortgage: This is the most common type of Lifetime Mortgage. Interest is added to the loan amount over time, and the total amount is repaid when you pass away or go into long term care.
Interest-Only Lifetime Mortgage: With an Interest-Only Lifetime Mortgage, you only pay the interest on the loan each month, which stops the amount owed from increasing.
Drawdown Lifetime Mortgage: With a Drawdown Lifetime Mortgage, you can access your equity in stages, rather than as a lump sum. This can help to reduce the amount of interest that is charged as you as are only charged interest on the amounts taken.
Enhanced Lifetime Mortgage: An Enhanced Lifetime Mortgage is available to homeowners with certain health conditions or lifestyle factors that may impact their life expectancy. This can allow them to access a larger loan amount.
Lifetime Mortgages can be a useful way for homeowners to access the equity tied up in their property. They offer a way to supplement your income in retirement, pay off debts, or fund home improvements, without having to sell your home or move out. However, it’s important to understand the risks and disadvantages of Lifetime Mortgages, including the impact on your estate and the amount of interest charged. By considering all options and seeking independent legal and financial advice, you can determine if a Lifetime Mortgage is right for you.
The Pro's of a Lifetime Mortgage
A Lifetime Mortgage can be an attractive option for homeowners who are looking to access some of the equity tied up in their home without having to sell the property. There are several advantages to this type of equity release product, including:
No Monthly Payments
One of the biggest advantages of a Lifetime Mortgage is that there are no monthly payments required. This means that you can access the equity in your home without having to worry about making regular loan repayments. And more importantly not worry about repossession due to non payment. Instead, the interest on the loan is added to the loan balance and is repaid when you pass away or move into long term care. You do however have the option to make payments in order to reduce the roll up effect of the balance. Most products will allow you to make payments of up to 10% of the initial amount borrowed per year.
Flexibility
Lifetime Mortgages offer a degree of flexibility, allowing homeowners to choose how they receive their funds. Depending on the product, homeowners may be able to access their equity as a lump sum, a regular drawdown, or a combination of the two. This means that homeowners can tailor their borrowing to suit their individual needs and circumstances.
You Retain Ownership of Your Home
With a Lifetime Mortgage, you continue to own your home and have the right to live in it for the rest of your life. This can provide peace of mind for homeowners who are concerned about losing ownership or control of their property.
You Can Access Tax-Free Cash
The funds released through a Lifetime Mortgage are tax-free, which can be a significant advantage for homeowners who are looking to supplement their retirement income.
No Negative Equity Guarantee
Many Lifetime Mortgages come with a no negative equity guarantee, which means that you will never owe more than the value of your home. This can provide reassurance for homeowners who are concerned about the risk of owing more than their property is worth.
No Credit Checks Required
Unlike other types of loans, Lifetime Mortgages do not require a credit check. This means that they are available to homeowners regardless of their credit score or income level. Most lenders however have certain criteria regarding County Court Judgments/bankruptcy etc.
A Legacy for Your Family
By releasing equity from your home through a Lifetime Mortgage, you can create a legacy for your family. This can help to provide financial security for your loved ones and may allow you to help them achieve their goals, such as buying a home or paying for education. The bank of mum and dad is still going strong and many people look to utilise Equity Release to gift to their family.
Lifetime Mortgages can offer a range of advantages for homeowners who are looking to access the equity tied up in their home. They provide a flexible way to release tax-free cash, without having to sell your property or move out. Additionally, Lifetime Mortgages offer a range of other benefits, including no monthly payments, no credit scoring, and a no negative equity guarantee. However, it’s important to carefully consider the risks and disadvantages of Lifetime Mortgages before deciding if they are the right option for you. By seeking independent legal and financial advice, you can make an informed decision and determine if a Lifetime Mortgage is the best way to achieve your financial goals.
The Con's of a Lifetime Mortgage
While Lifetime Mortgages can offer many advantages to homeowners looking to access the equity tied up in their homes, there are also some potential disadvantages that should be carefully considered before deciding if this is the right option for you. Here are some of the key cons/disadvantages of a Lifetime Mortgage:
The Interest Can Accumulate Quickly
One of the biggest risks of a Lifetime Mortgage is that the interest can accumulate quickly over time, especially if the loan has a high interest rate or if you borrow a large amount. This means that the total amount owed can quickly exceed the value of the property, which could impact your ability to leave an inheritance for your loved ones. Take a look at our “Equity Release Compound Interest Calculator” to get an idea of how it can roll up.
You May Receive Less Than Expected
The amount of money that you can release through a Lifetime Mortgage will depend on the value of your home and your age. While this can provide a significant source of tax-free cash, it’s important to remember that the amount you receive may be less than you ideally want. Additionally, if you have a partner, the amount of money you can release may be lower if they are younger than you. Feel free to ask for a personalised illustration.
Reduced Inheritance
If you are considering a Lifetime Mortgage, it’s important to remember that the amount of money you release from your property will reduce the value of your estate, which could impact your ability to leave an inheritance for your loved ones. Additionally, if you have a partner and they are not on the mortgage, they may not be able to stay in the property after you pass away, which could impact their financial security. Again, these scenarios would need to be discussed with your adviser.
The Effect on Means-Tested Benefits
If you receive means-tested benefits, such as pension credit or council tax reduction, taking out a Lifetime Mortgage could impact your eligibility for these benefits. This is because the money released from your property will be considered as capital and could reduce your entitlement to means-tested benefits. There is little point in releasing equity to put in your account whilst losing your benefits. Any lump sums would need to be utilised in some way and not sitting around in your bank account increasing your “savings” amount. For this scenario a drawdown mortgage may be the best option.
Early Repayment Charges
If you decide to repay your Lifetime Mortgage early, you may be subject to early repayment charges. These charges can be significant, especially if you repay the loan within the first few years. Additionally, if you sell your property before the loan is repaid, you may be required to pay off some of the mortgage balance, including any interest that has accumulated. Most products however will allow you to “port” the mortgage to a new property if you choose to move. This area should be discussed with your adviser prior to any applications being made. Some products come with fixed early repayment charges and some come with variable early repayment charges.
While Lifetime Mortgages can offer many advantages, it’s important to carefully consider the potential downsides before making a decision. The interest can accumulate quickly, which could impact your ability to leave an inheritance and the equity released could impact your eligibility for means tested benefits. Additionally, early repayment charges can be significant, and the amount of money you receive may be less than you expect. By seeking independent legal and financial advice, you can make an informed decision and determine if a Lifetime Mortgage is the best way to achieve your financial goals while minimizing the potential risks.
How to Determine if a Lifetime Mortgage is Right for You
A Lifetime Mortgage can be an attractive option for homeowners who are looking to release equity from their property without having to sell it. However, it’s important to carefully consider whether this type of loan is right for your individual needs and circumstances. Here are some key factors to consider when determining if a Lifetime Mortgage is the right option for you:
Your Age
The amount of money that you can release through a Lifetime Mortgage will depend on your age and the value of your property. Generally speaking, the older you are, the more money you can release. If you are younger, you may not be able to release as much equity, which could impact your ability to achieve your financial goals.
Your Financial Situation
Before deciding if a Lifetime Mortgage is the right option for you, it’s important to consider your overall financial situation. This includes your income, savings, investments, and any outstanding debts. A financial advisor can help you determine if a Lifetime Mortgage is a suitable option based on your financial circumstances.
Your Family Situation
It’s also important to consider the impact of a Lifetime Mortgage on your family situation. If you have a partner, they will need to be included in the decision-making process, as the loan will impact both of your financial futures. Additionally, if you have children or other dependents, you will need to consider how the reduced value of your estate could impact their financial security.
Your Long-Term Goals
Finally, it’s important to consider your long-term financial goals when deciding if a Lifetime Mortgage is right for you. If you have other sources of income or savings that can help you achieve your goals, a Lifetime Mortgage may not be necessary. However, if you need a significant amount of cash to pay for expenses like home repairs, medical bills, or to supplement your retirement income, a Lifetime Mortgage could be a viable option.
A Lifetime Mortgage can provide a valuable source of tax-free cash for homeowners who are looking to release equity from their property. However, it’s important to carefully consider your individual needs and circumstances before deciding if this is the right option for you. Factors like your age, financial situation, health, family situation, and long-term goals should all be taken into account before making a decision. By seeking independent financial and legal advice, you can make an informed decision and determine if a Lifetime Mortgage is the best way to achieve your financial goals.
Alternatives to Lifetime Mortgages
While a Lifetime Mortgage can provide a valuable source of cash for homeowners who are looking to release equity from their property, it’s important to consider all of your options before making a decision. Here are some alternatives to a Lifetime Mortgage that you may want to consider:
Downsizing
One of the simplest alternatives to a Lifetime Mortgage is to downsize your property. By selling your current home and purchasing a smaller, less expensive property, you can release equity without taking on any debt. This can be a good option if you are looking to simplify your lifestyle and reduce your expenses in retirement.
Home Reversion Plans
A Home Reversion Plan is a type of equity release plan that allows you to sell all or part of your property to a provider in exchange for a lump sum or regular payments. Unlike a Lifetime Mortgage, you wont be charged interest on the amount you borrow, but you will receive a lot less than the full market value of your property.
Retirement Interest-Only Mortgages
A Retirement Interest-Only Mortgage is a type of mortgage that allows you to borrow against the equity in your home. With this type of mortgage, you only pay interest on the amount you borrow, and the loan is typically paid off when pass away. You will however have to pass the lender affordability criteria and just like standard residential mortgages your home would be at risk if you couldn’t keep up repayments.
Savings and Investments
If you have savings or investments that you can use to fund your retirement, you may not need to take out a Lifetime Mortgage or any other type of loan. By using your existing assets to supplement your income, you can reduce your financial risk and maintain more control over your financial future.
While a Lifetime Mortgage can be a good option for homeowners who are looking to release equity from their property, it’s important to consider all of your options before making a decision. Downsizing, Equity Release Plans, Home Reversion Plans, Retirement Interest-Only Mortgages, and savings and investments are all alternatives that you may want to consider. By seeking independent financial advice and carefully weighing the pros and cons of each option, you can make an informed decision and choose the path that’s right for your individual needs and circumstances.
Risks to Consider When Taking Out a Lifetime Mortgage
If you’re considering taking out a Lifetime Mortgage, it’s important to be aware of the risks involved. Here are some of the main risks to consider:
Interest rates
Lifetime Mortgages typically have higher interest rates than standard mortgages, and the interest is compounded over time (if you decide not to make any payments). This means that the amount you owe can quickly grow to be larger than the amount you originally borrowed. With a lifetime mortgage the rates are fixed for life so if rates start to drop you will be tied into the higher rate. You could however look to re-mortgage to a lower rate however any early repayment charges would need to be taken into consideration. Again, all this should be explained to you by your adviser prior to making any application.
Negative equity
If you decide not to make any payments towards your mortgage then the interest on a Lifetime Mortgage is compounded. Depending on the rate, the amount and how long the mortgage runs for, it’s possible that the amount you owe could eventually exceed the value of your property. This is known as negative equity. If this occurs and you pass away then in theory the balance is above the value of your property. With a Lifetime Mortgage however you do have something called a “No Negative Equity” guarantee. This means your beneficiaries will never owe more than the market value of the property and there will never be a debt left to your beneficiaries.
Inheritance
Taking out a Lifetime Mortgage can reduce the amount of inheritance you leave to your loved ones. This is because the interest on the loan can quickly eat into the value of your property. If leaving an inheritance is important to you, you may want to consider alternative options that don’t involve borrowing against your property.
Early repayment charges
Most Lifetime Mortgages have early repayment charges, which can be significant. If you decide to repay your loan early, you may be required to pay a penalty. It’s important to consider whether you may need to repay the loan early, and to factor the cost of any early repayment charges into your decision. As mentioned above, some products will have fixed early repayment charges and some will have variable charges. The fixed options could mean early repayment charges for a period of between 5-15 years. The variable ones are usually between zero and 25% of the balance depending on the Gilt rate at the time of payment. The risk here is that if your mortgage balance is £100,000 and you decide to repay it, the penalty could be anywhere between zero and £25,000. With fixed early repayment charges you will know what they will be from the outset.
Changes in personal circumstances
Lifetime Mortgages, as the name suggests, are usually for your lifetime. Your adviser will discuss any changes that may occur in the future. For example if you are due any inheritance in the future, and if this would be used to clear any of the mortgage. If it’s a joint application how would the circumstances change on first death? Are you likely to require further funds in the future? All these things will be discussed during your initial fact find appointment.
Restrictions on future borrowing
Once you take out a Lifetime Mortgage, it may be difficult to borrow against the equity in your property in the future. This is because the amount you owe on the mortgage will increase over time, reducing the amount of equity you have available.
A Lifetime Mortgage can be a good option for some homeowners who are looking to release equity from their property, but it’s important to be aware of the risks involved. Higher/lower interest rates, negative equity, reduced inheritance, early repayment charges, changes in personal circumstances, and restrictions on future borrowing are all risks that you should consider carefully before making a decision. By seeking independent financial advice and weighing up the pros and cons of each option, you can make an informed decision that’s right for your individual needs and circumstances.
Legal and Financial Considerations for Lifetime Mortgages
If you’re considering taking out a Lifetime Mortgage, there are some important legal and financial considerations to bear in mind. Here are some of the key things to think about:
Legal advice
During the application process you will also need independent legal advice before taking out a Lifetime Mortgage. A solicitor can help you understand the legal implications of the mortgage and ensure that you fully understand the terms and conditions. They can also advise you on the potential impact of the mortgage on your estate and inheritance.
Equity release providers
There are many different equity release providers and brokers offering Lifetime Mortgages, and it’s important to choose a provider that’s regulated by the Financial Conduct Authority (FCA). The FCA sets standards for the equity release market and provides protection for consumers. You should also look for the Equity Release Councils Logo and ensure your adviser, lender and solicitor and all registered and members of the council.
Eligibility criteria
There are various eligibility criteria that you must meet in order to qualify for a Lifetime Mortgage. These can include your age, the value of your property, and any outstanding mortgage debt. It’s important to check whether you meet the criteria before applying for a lifetime mortgage.
Repayment options
There are different repayment options available with Lifetime Mortgages. Some allow you to make monthly interest payments, whereas most will allow you to make ad hoc payments up to the specific amount before penalties will be payable. It’s important to consider which option is right for you, based on your individual circumstances and financial goals.
Inheritance protection
Many Lifetime Mortgages offer inheritance protection options, which allow you to ring-fence a portion of the property value to pass on to your heirs. It’s important to consider whether this is something you require, and to check whether the provider offers this option. If you do choose this option this would normally mean a lower amount would be available to release.
A Lifetime Mortgage can be a useful way to release equity from your property, but it’s important to consider the legal and financial implications carefully before making a decision. Seeking independent legal and financial advice, checking the eligibility criteria and reputation of the equity release provider, understanding the interest rates and repayment options, being aware of the tax implications, and considering inheritance protection options are all important steps to take. By taking these steps and weighing up the pros and cons of each option, you can make an informed decision that’s right for your individual needs and circumstances.
Links to the above videos Playlist are below
Intro – https://youtu.be/Oxr4lmg8xPI
Part 1 – What Are Lifetime Mortgages – https://youtu.be/BoRhvoZLpxw
Part 2 – The Pros of Lifetime Mortgages – https://youtu.be/TgsY7CkO9ns
Part 3 – The Downsides of Lifetime Mortgages – https://youtu.be/tCj3cJpvTaw
Part 4 – How to Determine if a Lifetime Mortgage is Right For You – https://youtu.be/J3-05Z9Fs-0
Part 5 – Alternatives to Lifetime Mortgages – https://youtu.be/0w2AUIprF_o
Part 6 – Risks to Consider When Taking Out a Lifetime Mortgage – https://youtu.be/jcabC7L55u0
Part 7 – Legal & Financial Considerations for Lifetime Mortgages – https://youtu.be/GWE8j4kSAjo
This is a lifetime mortgage. To understand the features and risks, please ask for a personalised illustration. Check that this mortgage will meet your needs if you want to move or sell your home or you want your family to inherit it. If you are in any doubt, seek independent advice. There may be a fee for advising on Equity Release Lifetime Mortgages. This will be a maximum of £995 on completion. Reynolds Financial is a trading style of The Later Life Lending Network Ltd, an appointed Representative of the Right Mortgage Network ltd which is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales no. 09832887. Registered address is 70 St Johns Close, Knowle, Solihull, B93 0NH. Estate planning is not regulated by the Financial Conduct Authority.