A lifetime mortgage is a loan facility available to homeowners who are over 55 years old. They are secured against a home, a second home or a buy to let property, allowing you to raise capital whilst maintaining ownership of your home. The mortgage does not have to be repaid until the borrower either dies or moves into long term care.
There is no requirement for monthly payments, as the interest is usually added to the mortgage facility and repaid at the end of the mortgage term.
However, some lifetime mortgages have the facility to allow you to make monthly interest payments, reducing the amount that will be repayable at the end of the mortgage term.
Some plans will also enable you to ring-fence part of the value of your home in order to protect an inheritance for your family
The mortgage can be redeemed at any time, however the facility is set up to be cleared upon the death of the borrowers or when they go into long term care. At this point your home will be sold and the loan repaid. Any remaining money will then be paid to your estate.
Most lifetime mortgages offer a negative equity guarantee so that your estate will not be liable for any shortfall if the value of your house at the time of sale is less than the balance of the mortgage. KIS Finance only offers lifetime mortgages that include a negative equity guarantee.
If you release equity from your home using a lifetime mortgage, you will continue to own the property. You don’t need to worry about affordability as there are no monthly payments to make. The money borrowed and any interest accrued isn’t repayable until after you die or go into long term residential care.
Lifetime mortgages usually have a fixed rate of interest. Each year the interest is calculated on a compound basis. This means that the interest is charged on the original loan amount plus the interest added in the previous years. This does mean that the interest can mount up quite quickly, as you’re paying interest on the interest.
If you prefer to pay off some of the interest each month or in lumps, then some lifetime mortgages will allow you to do this.
Rolled up lifetime mortgages
This allows you to take a cash lump sum with no monthly payment to make
Drawdown lifetime mortgage
This option gives you the flexibility to draw down the money as you need it rather than in one lump sum. That way you are only charged interest on the money drawdown, helping to keep the cost down.
Interest-only lifetime mortgage
This option allows you to access a cash lump sum. But by paying a certain amount of interest each month rather than allowing the interest to roll up each year, you can keep the costs down.
The amount of interest added to your lifetime mortgage will depend on the interest rate applied. Unlike mortgage interest rates, lifetime mortgage interest rates are usually fixed for the life of the loan.
The interest on a lifetime mortgage is applied on a compound basis, which means that each year you will pay interest on the original loan as well as on the interest that has already been applied.
Therefore the amount you owe at the end of the loan will depend on the length of the loan. The longer the term of the loan the larger the final repayment will be. This is something to consider if you are hoping to still leave some of the value of your property to your beneficiaries.
The actual rate of interest applied to your loan will depend on your individual circumstances as well as the mortgage product selected. The following will all influence the interest rates available:
A lifetime mortgage is a flexible option that allows you to enjoy the benefits of some of the value that is locked up in your home. There are 5 key reasons that make a lifetime mortgage an increasingly popular option for those over 55 who are looking to access some additional funds.
Our expert advisors, Jerry and Lyndsey, will answer all of your questions and let you know if a lifetime mortgage is right for you. There’s no pressure whatsoever and also no fees for our advice. In fact, we don’t charge any broker fees, not even upon completion of a lifetime mortgage facility!
The lenders do pay commissions which are fully disclosed. We do not require broker or arrangement fees in addition to any commission payments.
Equity release is a really flexible option as you can use the money however you choose. The money is paid tax-free, and you can either receive it as a lump sum, as regular payments or as and when you need it.
Here are some common examples of ways that customers have utilised lifetime mortgage.
Maybe you’ve always wanted a dream kitchen or need to convert your bathroom to a wet room for easy access. Or perhaps you want to extend your property, so you have space for the grandchildren to stay.
Lifetime mortgages can be used to purchase property. We have clients who have sold their homes and moved to more expensive properties. This is achieved by using the proceeds from selling their old home then raising any extra funds required through a lifetime mortgage secured on the property being purchased.
Rather than waiting until you can leave them an inheritance, many people use equity release to enable them to provide financial assistance to their family at a time when they really need it.
You may be struggling to keep up with mortgage or loan repayments now that you are retired and finding that your pension doesn’t go as far as you would like.
Releasing money from your property can enable you to pay off any debts without the need for monthly repayments as you can choose to roll up the interest.
Alternatively, you can choose to simply pay the interest off monthly, still leaving yourself with more disposable income and able to enjoy a better standard of living in your retirement.
Planning ahead can save you considerable sums when it comes to inheritance tax and a lifetime mortgage can play a key part in this. Releasing money from your property will have the effect of decreasing your estate by the same value, as the lender will take what they are owed when your house is sold.
As your estate will be worth less it will be subject to less inheritance tax, or possibly none at all if your estate falls below the Inheritance Tax threshold – good news for your beneficiaries.
If you gift some of the money released to your family, they can enjoy their inheritance early and provided that the gift is made over 7 years before you pass away, it won’t be subject to any inheritance tax. However, even if it is within this time period, it will be subject to IHT at a reduced rate.
You many decide to buy a second property with the equity released, possibly as a holiday home for the family to enjoy. Or you could purchase a buy to let property as an investment to bring you in a rental income. Depending on how much equity you release you may be able to buy the property outright or put down a good deposit.
As you can choose to roll up the interest, you won’t have to worry about making lifetime mortgage payments. However, you can still choose to pay off the interest monthly to avoid the cost of it building up over time.
Later in life you may find it helpful to have additional funds available to pay for extra care that you need or to give you more options and choice when it comes to health care.
You may simply choose to use the additional money to help you improve your standard of living and be able to afford life’s little luxuries during your retirement years.
There are no restrictions on how you use the money that you’ve released. You could use it to clear other debts, such as any existing mortgage or loans. Spend it on the holiday of a lifetime or support your family by perhaps providing a house deposit to help them get on the property ladder.
Lifetime mortgage plans offer a range of flexible repayment options to suit your circumstances. Most plans don’t require any monthly repayments as the interest is rolled up and added to the original loan amount. Both any funds released, and the interest charged, are then paid off when your property is sold.
If you prefer to reduce the final debt you can chose from options such as an interest only plan where you pay back the interest each month but none of the capital (money/funds released). With a voluntary repayment plan you can choose to pay back up to 10% of the initial loan each year, and with an optional repayment plan you can stop making monthly payments if you can no longer afford them.
With a lifetime mortgage you still own the property so your estate will benefit from any increase in the value of your home during the term of the plan. When the property is sold the lender will supply a redemption statement (made up of the original loan amount and interest charges, less any payments made) and take back what they are owed. Any remaining proceeds from the sale will go to your beneficiaries.
Most lenders will offer a negative equity guarantee with their plans to give you the peace of mind that you won’t ever be left still owing any money following the sale of your property. If the property has significantly decreased in value, the lender will write off any shortfall once the property has been sold. Therefore, neither you nor your beneficiaries will be liable for the debt.
If you choose a plan with rolled up interest, this will build up on a compound basis. This means that each year interest will be added, not only on the original amount of the loan, but you’ll also be charged interest on any interest that has already been added. Depending on the term of the loan, this could build up over time to a substantial amount over and above the original loan.
If you choose a plan with rolled up interest the cost of this along with the original loan will be taken from the value of your estate when you pass away. This will of course affect the value of any inheritance you that you leave to your beneficiaries.
Lifetime mortgages are designed for life so if you do find yourself wanting to pay it off early you are likely to face a financial penalty in the form of an early repayment charge. For lifetime mortgages this can typically be a charge of up to 10% of the mortgage facility.
These charges do however usually decrease over time – Early redemption charges and how they are calculated are clearly detailed in any loan terms that we provide.
Equity release is in effect increasing your income during your retirement so this may affect your eligibility for certain benefits if they are means tested.
A couple in their mid-sixties from South Wales approached us for help when their mortgage term came to an end. They had an interest-only mortgage that they had intended to repay by downsizing, but they no longer wanted to move out of the family home as they could not find anywhere else that they wanted to live locally.
They had plenty of equity in the property, so we were able to arrange an equity release lifetime mortgage for them, allowing our clients to pay off their existing mortgage. They were concerned about the interest rolling up and the debt growing since it was important to them to leave an inheritance to their children and grandchildren, so they opted to pay the interest on a monthly basis.
They were relieved that they could stay in the home they love for the rest of their lives without counting down the number of years left on the mortgage.
Last updated: 09 August 2022 | © KIS Bridging Loans 2020