Many people approaching retirement may be looking at a pension pot that is smaller than they would like and a home that is worth much more than they bargained for.
The latest figures for house prices, from May 2021, show the average UK house price was £254,624, compared with an average pension pot of just £21,441.
Could a lifetime mortgage allow them to access some of the wealth they have built up in their homes, without the upheaval of downsizing? At Continuum we are looking at the possibilities, and whether the advantages always outweigh the disadvantages.
What is a lifetime mortgage?
A lifetime mortgage is a type of equity release. It is technically a loan secured against your home that allows you to release tax-free cash without needing to sell up or move out. Your home remains yours.
For most people the benefits, unlike a conventional mortgage is that there is no monthly repayment required.
Many people use the cash they raise with a lifetime mortgage to top up their monthly income in retirement, but there are actually no restrictions. You can use the money you release for home improvements, helping children buy their first property or even pay off your existing mortgage.
Lifetime mortgages are available to homeowners aged 55 or over. You can take the money as a lump sum, as a series of lump sums or as regular income.
How do they work?
A lifetime mortgage is a loan secured on your home, but unlike most loans, it does not have a set repayment date. In fact, you don’t have to repay any of the money you borrow, until you move permanently out of the home and into long-term care or you die.
You can have a lifetime mortgage in joint names and nothing needs to be repaid until the last person moves into long-term care or dies.
The loan is usually repaid through the sale of your home. However, you need to remember that the lender will charge interest, and this will go on building up. If you live long enough, the interest that you owe could be more than your home is worth.
A Lump Sum Lifetime Mortgage lets you release equity from your home in one lump sum of money. A Drawdown Lifetime Mortgage lets you release an initial amount of money, while also creating a reserve of further funds.
Whichever approach you choose, interest will only be charged on what you borrow, and added to what you owe.
The pros and cons
A lifetime mortgage can be an efficient way to release cash from your home and it can be tax free. It is flexible; you can take a lump sum or a monthly income. Alternatively, although most people choosing a lifetime mortgage will have paid off their original mortgage, it may be possible to pay off an outstanding mortgage with a lifetime mortgage. This will give you a simple way to live without mortgage payments hanging over you.
With some lenders you may even be able to move and carry on with your lifetime mortgage.
But what about the downsides?
With a reputable lender, whatever happens you’ll never repay more than the value of your home when it is sold – even if that’s less than the amount owing. But you may find that the value of your estate is eaten up and even if you choose a lender who will arrange to ringfence some of your wealth to pass on, releasing equity with a lifetime mortgage is likely to reduce how much you can leave as an inheritance.
There may also be problems if you want to claim means tested benefits.
Getting some help
A lifetime mortgage is a major commitment. Expert advice is essential.
At Continuum we can search the entire market to find the mortgage product that is right for you. We compare all the offers from the major lenders and from specialists – but we put your needs first.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to a suitable Equity Release product, you should seek independent financial advice before embarking on any course of action.
A lifetime mortgage is a loan secured on your property.
lifetime mortgages are complex products. To understand the features and risks, ask for a personalised illustration.
Equity release will reduce the value of your estate and may affect your entitlement to means tested state benefits.
If you pass away soon after taking out the plan, you have effectively sold your property cheaply. However some plans have provisions in place so that you are protected.
It can be difficult to reverse the deal once it has been made, as you are selling part of your home.
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