Lifetime Mortgages for Pensioners
If you’re hoping to top up your pension income in later life, you might be wondering if an equity release scheme or lifetime mortgage is suitable for you.
This article will answer some of the most frequently asked questions about equity release via lifetime mortgages in retirement.
It will talk you through eligibility requirements and help you make an informed choice.
Topics you will find in this article
What is the difference between a lifetime mortgage and equity release?
A lifetime mortgage is a type of equity release which allows you to use some of the money which is currently tied up in the value of your home.
You can continue to live at this property, and many people who release money from their home with a life mortgage actually spend the additional income on home improvements.
The loan is secured on your home and won’t need to be repaid until either:
- after the death of the last member of the household on the property deeds
- or, until you go into long-term care.
When one of these situations arise, your home will be sold. Then, the money received from the sale of the property will be used to pay off the loan and the interest that has accrued on the loan amount.
Any additional income from the sale of your house will go to your beneficiaries.
The loan, like all other equity release products, will be authorised and regulated by the financial conduct authority.
You can learn more about lifetime mortgages by watching the video below, which guides you through the benefits and disadvantages of taking on one of these services in later life.
This is a video from Legal & General that shows you how a lifetime mortgage works.
Are there different kinds of lifetime mortgages?
Lenders offer three main types of lifetime mortgage plan. You should speak to a financial adviser to see which is the best plan for your circumstances.
Lump sum lifetime mortgage
With this a kind of equity release plan, you receive one cash lump sum.
Interest then builds up on the amount of money the mortgage holders have released. The proceeds from the sale of your home are used to repay this in addition to the capital value of the lump sum once the last owner on your property deeds moves into long-term care or dies.
Drawdown lifetime mortgage
With a drawdown lifetime mortgage, you can release equity with more flexibility than you can with other mortgages.
The most important features are that a homeowner can release an initial cash sum and leave the rest of the money in a special reserve account. The money in the reserve account can then be released when you need it in later life, for example, to top up your pension income in a series of smaller withdrawals.
Not only does this give you the safety of a cash reserve, but with this kind of mortgage product you will only have to pay interest on the amounts you have released. Therefore, this form of equity release offers a popular solution to help minimise the amount you ultimately repay.
Because this brings down the overall cost of the loan, this also means there is the potential for more to be left to your estate than with lump sum products.
Flexible lifetime mortgage
Some lifetime mortgage plans have the name ‘flexible’ because they allow for payments to be made to the lender.
These plans usually include an option to make monthly payments toward the loan amount. But they are voluntary, so you don’t have to make a payment if you don’t want to or can’t afford to.
You should call a specialist adviser to receive more support and advice about which deal is right for you. They can help you find the best deals for your own personal finances, and guide you through the application process with a solicitor.
"Unlike with other mortgages, there is usually no maximum age for a lifetime mortgage product. The older you are, the more you can normally borrow."
Do I qualify for a lifetime mortgage?
To qualify for a lifetime mortgage you must:
- Own a home considered to be in good condition. It must be your main residence, and some lifetime mortgage providers‘ lending criteria specify that listed properties or sheltered housing will not be accepted.
- Be aged 55 or older. In joint applications, both of the homeowners must be aged 55 or older.
The amount you qualify to unlock will depend on your age and your property prices. If your state of health qualifies for an enhanced plan, then you can release more equity.
When you apply, you may need to provide buildings insurance information, income details, and information about any credit commitments you may have. Investment customers will likely be asked to provide information about their investments.
What is the maximum age for a lifetime mortgage?
Unlike with other mortgages, there is usually no maximum age for a lifetime mortgage product. The older you are, the more you can normally borrow.
How is interest charged on lifetime mortgages?
Unlike with a standard mortgage, the interest on a life mortgage will be charged as an increasing or fixed interest rate. This is due to the fact that you do not have to make monthly payments.
However, with the majority of lifetime mortgages, you will never end up in a situation where you need to repay more than your home’s property value. This is thanks to the UK’s Equity Release Council (a trade body) ‘no negative equity’ guarantee that lifetime mortgage customers will never have to make such repayments.
Interest can be re-payed to the lender:
- During the mortgage term if you have a ‘flexible’ service
- Or, when your house is sold upon completion of the term. In this case, the money gained from the sale of your home is used.
Can you pay off a lifetime mortgage?
Most lifetime mortgages will not allow you to repay the loan. This is because this type of equity release is based on interest building up over the life of the mortgage term.
Therefore, the fixed lifetime mortgage interest rates can mean that your debt can become very large much more quickly than you might expect. As a result, if you live for a long time, little to nothing of your property’s value may be left as inheritance to your family.
However, if a borrower does decide that they want to end their lifetime mortgage early, the mortgage provider will charge fees for early repayment.
Lenders tend to use prevailing government bond rates as the basis for this charge. Unfortunately, this means that the costs for ending a term early are not very transparent.
You can read more advice from money experts on early mortgage payments here.
Are there any additional costs?
It is important to make sure you understand and are content with the potential additional fees you may be required to pay when applying for a lifetime mortgage.
Depending on individual factors and which company you choose, you may have to pay:
- Buildings insurance
- Legal and valuation fees
- An arrangement charge
- A price for an advisory team’s help
- A completion fee or early repayment charge
A lifetime mortgage may also impact your entitlement to state benefits and pension credit.
Read more financial advice here.
Are there other ways of releasing equity?
Home reversion plans
These are an alternative way of releasing equity from your home. However, they are less popular than equity release with a mortgage, and the Equity Release Council has confirmed that home reversion services only make up a small percentage of equity plans taken up in later life.
A home reversion plan is when part or all of your property is purchased by the lender, who will then provide you with either a lump sum or regular transfers to your bank account in return for these assets.
A lifetime lease will grant you the right to stay in rent-free residence for the rest of your life, even though you no longer have ownership of the property.
Interest only retirement mortgages
These are a fairly new set of products that companies are offering as another alternative to lifetime mortgages.
These mortgages allow you to borrow money secured against your property, but you will only make monthly interest payments, and not payments on the debts for the loan itself.
Read more about interest only mortgages in retirement here.
Other articles related to lifetime mortgages you will find useful
What is a Lifetime Mortgage?
Lifetime mortgages are relatively new to the market – but their growing popularity means they’re already an industry staple. Increasingly people are looking to access cash with no strings attached in retirement.
Lifetime Mortgage Providers
If you are considering getting a lifetime mortgage, you will want to take a look at the leading lifetime mortgage companies. This article looks at who the main UK providers are and what they offer.
Drawdown Lifetime Mortgage
A drawdown mortgage allows homeowners to withdraw an initial cash lump sum, while having the flexibility to borrow more at a later date. You can then ‘draw down’ this equity when you please under terms agreed with the lender.
Lifetime Mortgage For Pensioners
Unlike with other mortgages, there is usually no maximum age for a lifetime mortgage product. The older you are, the more you can normally borrow.
Lifetime Mortgage Rates
The rate mortgage customers receive depends on the loan size and type. Normally, though, they begin at around 3% and go up to a maximum of around 7%.
What is a Home Reversion Plan?
A home reversion plan is a form of equity release scheme. Equity release schemes are a way of releasing some of the value of your property in exchange for cash.