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Lifetime Mortgage

A comprehensive guide on lifetime mortgages

What is a lifetime mortgage?

A lifetime mortgage is the main type of equity release scheme and is heavily regulated by the Financial Conduct Authority (FCA).

A lifetime mortgage is a loan secured against your property, which is repaid when you die or go into long-term care. It allows you to free up the equity in your home without having to move or downsize.

In most cases, you do not need to make monthly payments on a lifetime mortgage as interest is added monthly and is repaid on the sale of the property. This is commonly known as rolled-up interest.

Lifetime mortgages have evolved dramatically over the last few years with over 500 products now available from many different lenders. Features available include:

- Pay the interest-only each month

- Make capital repayments

- Drawdown facilities for future borrowing needs

The main use for a lifetime mortgage is either to clear your outstanding mortgage and/or carry out home and garden improvements. A few other uses could be:

- Clearing unsecured debts

- Funding an upcoming holiday

- Providing support to loved ones

- Purchasing a new vehicle or property

 

However, any additional equity you use can be spent entirely as you please.

Working with an Independent Qualified Advisor

Although the agreement is between you and the insurance underwriter, it's often common and beneficial to work with an Independent Qualified Advisor, who will act on your behalf to find the best deal on the market for your circumstance. The advisor will act as a bridge between you and the underwriters, so they will ask you the questions required by the underwriter to generate a quote. The advisor will be rewarded by getting a pay-out from the underwriter, often there would be no cost to you for the use of their service and you get the benefit of their access to the whole market, which won’t be accessible to you without them.
Find out more

Requirements For Lifetime Mortgage 

The most basics requirements to be eligible for a lifetime mortgage are:
• You must own a property in England, Scotland, or Wales
• You must be a UK resident
• You must be 55 years old or over that age 
• Your property must be your main residence
Also, there can be some additional requirements and restrictions that may apply to the type of property you own.

Steps to taking out an equity release product

01
Fill in a web application

Fill in a web application

02
Speak to an independent advisor

Speak to an independent advisor

03
Find a product that works for you

Find a product that works for you

How much does a lifetime mortgage cost?
When you take out a lifetime mortgage, there are some costs involved. Let’s take a quick overview of each of these costs.

Valuation fee

The valuation fee is the cost of valuing your property. It is payable when the lifetime mortgage application is submitted. In some cases, the equity release provider will cover this cost.

Completion fee

A completion fee is paid when your lifetime mortgage term ends or you can choose to add it to the mortgage.

Solicitor fee

A solicitor will charge you a fee to deal with the lender for you and to register your lifetime mortgage at the land registry.

Advisor fee

If you have hired a financial advisor to take out a lifetime mortgage scheme, you may be charged for advice by your financial advisor.

Early repayment charge

If you decide to repay the loan before the lifetime mortgage term ends, there can be a charge by your lender.

What are the common features of a lifetime mortgage?

Option to move your home

Some providers allow you to move home with their lifetime mortgage plan so that you can avoid early repayment charges. If the new property is valued lower, you may have to repay part of the mortgage.

Cash reserve facilities

A few lifetime mortgage products have the option to have a pre-approved cash reserve facility for future borrowing needs. No additional financial advice is required in most cases as the facility is set up at the start and advice is given at that point.

Make interest or capital payments

Some lifetime mortgage products offer you the option to pay all or some of the interest each month. This gives you greater control over whether your mortgage balance increases or stays at the same amount. Also, you may be allowed to make capital repayments towards the mortgage and reduce the debt as well. There are strict rules for proving income and passing lending criteria with retirement mortgages, both repayment and interest only. The main difference with RIO mortgages is that the term isn’t fixed. You pay the interest each month until you die or move into long term care

Fixed interest rates

Most of the time, lifetime mortgages have fixed interest rates for the total loan duration. If you take out additional borrowing or drawdown against a cash reserve facility, the rate will also be fixed for the duration but it will be determined by the existing rate at the time you apply for the additional borrowing or drawdown. However, the equity release company won’t get its hands on anything until the property is sold, whether that is when you pass away or move into long term care. The amount the company offers to you will be well below the share’s actual value. For example, a 20% advance means surrendering 70% of your property’s value. The lender takes a larger share of your property, as they lend an initial amount and then have to potentially wait a long time before they see their money back.

Loan repayment

With a lifetime mortgage, the loan is usually paid when your property is sold in the event of your death or you move to long-term care. Your beneficiaries can retain ownership of the property by repaying your lifetime mortgage from their own resources or a new mortgage in their own names.

No negative equity guarantee

Almost all lifetime mortgage plans offer a no-negative guarantee. This means when the property is sold and your proceeds are not enough to pay the amount owed, including the essential fees, you or your beneficiaries will not be asked to pay the shortfall.

Optional inheritance guarantee

Some lifetime mortgage products allow you to protect a part of your property value from the start of the loan term. The percentage protected is guaranteed to be available on the sale of the property to you or your beneficiaries.

Early repayment waiver

Quite a few lifetime mortgage providers offer a waiver which means that in the case of joint borrowers, an early repayment charge will not be payable if you decide to repay the mortgage in the first few years of the first borrower dying or going into long-term care.

Downsizing protection

A few lifetime mortgage plans offer downsizing protection which means you're able to repay the mortgage without penalty if you're moving to a smaller property.

Retained ownership and no repossession

As long as you abide by the terms and conditions of the lifetime mortgage, you will always: • Retain ownership even if the rolled-up interest exceeds the value of your property • Have complete control • Be responsible for maintaining your property • Be able to live in your property until you die or go to long-term care

What are the types of lifetime mortgage?


Rolled-up lifetime mortgage


With a roll-up lifetime mortgage, you will get a cash sum with no monthly repayments. However, you will pay back the loan and the interest when your house is sold when you die or move to long-term care.

 

Drawdown Lifetime Mortgage


A drawdown lifetime mortgage works in a similar way to a standard lifetime mortgage but with the flexibility to take out cash as and when you need it.

The drawdown lifetime mortgage allows the borrower to take a smaller initial lump sum (or even no money upfront) and then agree a drawdown facility that can be used in the future. If you use the drawdown (i.e. take money out in the future) you pay interest on it, if you don’t take any money out, you don’t have to pay interest.

 

Flexible Lifetime Mortgage


A flexible lifetime mortgage is an added option for lifetime mortgages and drawdown plans that offers more flexibility with repayments. These equity release plans provide flexibility by having the facility to make ad-hoc repayments to the balance owed. Instead of the interest compounding on the balance you’ve released, you can pay back up to 40% per year without any penalties (depending on the lender you go with). The key advantages of a flexible lifetime mortgage plan are:

• Lower interest rates than interest-only plans
• Make repayments when it suits you
• Lower compound interest if you make voluntary payments
• Safeguard money for inheritance and keep control of the balance you release.

 

Enhanced Lifetime Mortgage


An enhanced lifetime mortgage, also known as an impaired lifetime mortgage, is an equity release product where the lending criteria is dependent on your health records.
An enhanced lifetime mortgage plan allows you to unlock more equity with lower interest rates. The weaker your health, the greater the capital you can access.

 

Interest-only lifetime mortgage


Much like a traditional interest-only mortgage, in an interest-only lifetime mortgage, the borrower can access money and pay back only the interest each month, rather than rolling interest into the end repayment. If you have a surplus income and can afford the interest payments this means when the plan is repaid, you’ll only pay back the initial amount borrowed

If you want to find out more and have any questions on the different types of lifetime mortgages then now might be a good time to speak to an equity release specialist. 
Both term insurances are often also referred to as mortgage protection insurance, as they frequently are put in place to cover the outstanding mortgage balance.

How much can you borrow?

The amount you are eligible to borrow depends on your circumstances which include your age and the equity in your property or loan to value (LTV).

In order to gain an accurate value of your property, an independent valuation will be undertaken by a qualified surveyor. 

What are the benefits and risks to a lifetime mortgage? 

Some of the benefits of a lifetime mortgage include:

- You retain ownership of your home and you can stay in it for the rest of your life

- The money released is tax-free

- You’ll be offered a no negative guarantee if you buy the lifetime mortgage plan from a member of the Equity Release Council (ERC). It means that you'll never owe more than the value of your home.

Let’s take a look at some of the risks involved in a lifetime mortgage.

- Your entitlement to state benefits and grants may be affected if you choose to take out a lifetime mortgage.

- Considering a lifetime mortgage as a short-term financial need and deciding to change the mortgage product after some time can incur huge switching costs

Equity Release Council

The equity release council (ERC), launched in 2012, is a UK organisation that promotes safe equity release products and ensures to safeguard the interest of the homeowners who opt to take out equity release from different UK lenders.

The ERC is supported by leading providers of equity release schemes and works with the UK government. Each member of the ERC council that offers equity release products, is bound by its comprehensive principles which aim to make the product safe for its consumers.

ERC Statement of Principles

The ERC statement of principles offers peace of mind to equity release companies and their consumers. The comprehensive principles mention that the members will:

  • Make sure that their actions promote confidence and awareness in equity release

  • Act at all times in good faith, with the best interest of consumers in mind, treating them fairly in all their actions

  • Ensure conflicts of interest are pointed out quickly and managed in all fairness

  • Deliver acceptable outcomes for consumers from the start of the equity release, through every point of contact during the life of the product


ERC Product Standards

According to ERC, the equity release product standards are as follows.

  • Interest rates must be fixed for lifetime mortgages. A cap should be used for variable interest rates till the life of the product.

  • You have the right to stay in your home until you move into long-term care or you pass away.

  • The equity release product must have “No negative guarantee”. It means that when the property is sold, and the agent and solicitor fees have been paid, if the amount left is not enough to repay the outstanding loan, you won’t be liable for them.

  • You can move to a new property if the new property is acceptable by your equity release provider.

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