You may have heard a lot about lifetime mortgages in recent years and, if so, you would not be alone. They are becoming increasingly popular and the average home value of people using the product has jumped £84,000 in the past 12 months to surpass £500,000.
So what is sparking all the interest, how do lifetime mortgages work and what drawbacks do you need to consider?
How do lifetime mortgages work?
A lifetime mortgage is a form of borrowing secured against the value of your home. You get a tax-free lump sum, and continue living in your home without the need to make any repayments. Interest will accumulate and then when you (or the last surviving borrower) move into long-term care or die, the debt becomes repayable.
You need to meet a minimum age criterion to take out a lifetime mortgage, typically 55 or 60, and then lending will be based on how old you are, your house value and interest rates. Bona fide providers will guarantee that the liable debt never exceeds the market value of your home, in what’s often called a ‘no negative equity guarantee’.
What do people use lifetime mortgages for?
As house prices have continued to rise, so much of people’s wealth has got caught up in their property. You may find that on paper you are wealthy, but don’t have liquid funds to enjoy your wealth, or even address fundamentals like roof repairs or a new car if your old one is not roadworthy.
Lifetime mortgages are a handy solution to this situation. You can free up the money you need without the fear of losing your home while you live in it. So if disaster strikes and you need to throw money at an emergency, you want to help your adult children get on the property market, or you just want to go on that retirement holiday of a lifetime, it all becomes possible.
What are the advantages of lifetime mortgages?
The structure that a lifetime mortgage gives you can be a major advantage. They are purpose built to provide you with cash now, without the need to repay until potentially much later.
The money is tax-free and you get to stay in your home. Depending on your product you may get the flexibility to move house at a later point, and you may have the flexibility to pay some of the money back early. There are no restrictions on how you choose to spend the money.
Are there any drawbacks to lifetime mortgages?
Because interest keeps accumulating without the capital sum being paid down (unlike a normal mortgage), they can turn out to be an expensive way to borrow money. As a specialist product, interest rates also tend to be higher than for regular mortgages. All this may mean, for example, that you are not able to leave as much inheritance after you are gone.
Lifetime mortgages typically come with early repayment charges should you wish to buy yourself out of it and, if you gift money to others, they may face an inheritance tax charge in the future depending on circumstances. Be aware too that a lifetime mortgage could affect your entitlement to state benefits.
As you can see, in certain circumstances a lifetime mortgage may be just right for you, but there is some complexity to understand; and that is before you go to market to choose your product. So it is essential to talk to experts like us to ensure that a lifetime mortgage is right for you, and to help you find the right product. For a no-obligation chat, please get in touch.