Our approach to retirement has changed; were enjoying longer life expectancies and our expectations of this time has shifted considerably.
It’s no wonder more people are considering property wealth as a tool to fund their retirement. After all, there could be more equity in their homes than cash in their pension pots.
While your clients may find the thought of releasing money from a home they’ve worked hard to own daunting, it doesn’t have to be.
A lifetime mortgage is a form of equity release that gives your clients the flexibility and choice to access cash in later life. Nevertheless, a lifetime mortgage is a big financial decision and myths still exist about how they work.
To understand the hesitations people may have, we asked a number of 55 to 75 year olds about some common misconceptions.
Lifetime loans, also known as lifetime mortgages or equity release loans, allow homeowners aged 55 and above to unlock some of the equity tied up in their homes. The funds can provide retirees with extra income to cover expenses, make home improvements, gift money to family, and more. But lifetime loans also carry risks that reduce inheritance value and can be expensive to set up and repay early. Weighing the pros and cons carefully is essential to determine if a lifetime loan is the right financial move for your situation.
How Do Lifetime Loans Work?
With a lifetime loan you take out a loan secured against your home typically between 15% to 60% of the property value depending on your age. The funds are paid out as a lump sum, but unlike regular mortgages, there are no set monthly repayments. Instead, the interest rolls up over time and is repaid along with the original loan amount when your home is sold. This happens either after you pass away, move into long-term care, or if you sell the property during your lifetime.
There are two main types of lifetime loans
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Rolled-up loans – The accrued interest is added to the loan balance so it compounds over time, This means you owe more in the end but have no repayments during the loan term,
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Interest-only loans – You pay off just the interest portion regularly to keep the total debt from ballooning. You still owe the original capital amount at repayment.
Lifetime loans are generally more expensive than standard mortgages, with higher interest rates and arrangement fees. However, they provide flexible access to cash without requiring monthly repayments or proof of income.
What Are the Benefits of Lifetime Loans?
Access tax-free cash – The loan payout is tax-free, so you get the full amount to spend as you wish. Using home equity allows larger lump sums than other retirement income sources.
Maintain ownership – You can unlock funds without selling up or downsizing. This helps you stay in your home and community.
Flexible use of funds – Money can be spent on anything from home improvements and debt repayment to medical bills, holidays, or gifts to loved ones.
No required repayments – Suit retirees on fixed incomes who struggle with mortgage-style monthly dues. Repayment flexibility helps cash flow management.
No negative equity guarantee – Outstanding debt cannot exceed the net sale proceeds of the property, protecting your estate’s value.
What Are the Downsides of Lifetime Loans?
Reduced inheritance – Passing on less value to beneficiaries due to accrued interest and fees deducted from property sale proceeds.
Risk of compound interest – Interest accumulation in rolled-up loans means debt grows exponentially over time if left unpaid.
High setup costs – Arrangement fees, valuation charges and solicitors fees often total £2,000-£3,000.
Early repayment charges – Exiting the loan quickly may incur penalties of up to 25% of the loan amount.
Ongoing interest rates – Typically 2-3% above standard mortgage rates, increasing lifetime costs.
Impact on benefits – Released equity can affect means-tested benefits entitlements. Get professional advice on any changes.
Future borrowing restrictions – Having an outstanding lifetime loan can limit other borrowing options later on if needed.
Key Factors to Consider Before Taking Out a Lifetime Loan
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Seek financial advice to review if it suits your full situation, objectives and options like downsizing. Advice is mandatory for lifetime loans.
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Shop around for the most competitive interest rates and features like drawdown facilities.
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Understand the small print thoroughly – loan-to-value ratios, fees, early repayment charges, etc.
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Compare rolled-up and interest-only options. Weigh up repayment flexibility vs. overall costs.
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Discuss intentions openly with family members before impacting their inheritance.
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Research alternative options to access funds like equity release, standard mortgages and grants.
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Choose an Equity Release Council approved lender for safety assurances and protections.
Can You Pay Off a Lifetime Mortgage Early?
You can repay a lifetime loan early, but exit fees often apply in the first few years. After this initial period, most providers let you repay the balance without penalty.
To fully redeem a lifetime mortgage, you’ll need to pay off the original capital borrowed plus all accrued interest and fees. Partial repayments are also possible with many lenders, making interest-only lifetime loans easier to reduce.
Financial advisors can help negotiate deals with lower early redemption fees or zero penalties if you may repay the loan sooner. They can also assist with remortgaging to pay off equity release loans.
Making an Informed Decision
Lifetime loans provide retirees with accessible funds for myriad uses in later life. But the decision carries huge financial implications for your own situation and inheritance wishes. Take time to carefully weigh up the pros, cons and alternatives before moving forward. Seeking expert guidance provides insights on the best approach for releasing equity from your home safely.
“I already have an outstanding mortgage – I can’t release equity.”
Fact: Even if your client has an outstanding residential mortgage, they can still release equity – providing they use the lifetime mortgage to repay the residential mortgage first.
This is dependent on the equity available and the terms and conditions of the mortgage.
“I’ll end up paying more than the value of my own home – my children will inherit my debt.”
Fact: Most lifetime mortgages are protected by the Equity Release Council’s ‘no negative equity’ guarantee; your client, or their estate, will never owe more than the value of their own home.
This means theyll never have to pay back more than the amount their property is sold for. Subject to terms and conditions.
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FAQ
What are the disadvantages of a lifetime mortgage?
Your debt is increased by interest
This is where you pay interest on the original loan amount plus the interest that’s already been added to the loan. As a lifetime mortgage doesn’t have to be repaid until you die or go into long term care, the amount owed could grow rapidly over the years.
Why would you get a lifetime mortgage?
… aged 55 or over, you could use a Lifetime Mortgage to help fund life in retirement, pay off an existing mortgage or help achieve your financial goals
Is it worth releasing equity from a house?
Potentially reduce the Inheritance Tax liability due on your estate. Reduce the potential amount of Inheritance Tax (IHT) owed by releasing equity from your home. By securing long-term borrowing against your property, you reduce your estate’s value. The value of your estate is the total of your assets minus any debts.
What is the maximum you can borrow on a lifetime mortgage?
You can typically borrow up to a maximum of 60% of your home’s value, either as a lump sum or in smaller amounts when needed. Unlike a traditional mortgage, there are no regular monthly repayments. Instead, the interest builds up and is added to your loan, which can cause the total amount owed to balloon over time.
Is a lifetime mortgage a good idea?
Everyone has unique circumstances, so asking if a lifetime mortgage is a good idea will depend on your financial situation. If you don’t want to make monthly payments on a mortgage and need a lump sum, then a lifetime mortgage may suit you.
What is a lifetime mortgage?
A lifetime mortgage involves unlocking some of the value tied up in your home. By using the equity in your property, which has built up from years of paying off your mortgage, you can get a lump sum or regular payments, without having to sell your home.
Are lifetime mortgages safe?
Lifetime mortgages are safe when handled by regulated professionals. Initiatives like the no-negative equity guarantee are in place to make sure you never owe more than the value of your home. Many lenders are registered with The Equity Release Council, who provide a set of standards to help protect customers.
What happens if you get a lifetime mortgage?
When you secure a lifetime mortgage, the amount you owe grows over time, which could ultimately reduce the value of the assets you pass on to your beneficiaries. For instance, take John, who took out a lifetime mortgage at the age of 65.
What are the benefits of a lifetime mortgage?
Regulated by the FCA. Lifetime mortgages are overseen by the Financial Conduct Authority (FCA). This makes sure that lenders and advisers stick to strict rules designed to protect you. No-Negative Equity Guarantee. One of the biggest perks is that you’ll never owe more than your home’s value—even if property prices drop.
What is the difference between a lifetime mortgage and equity?
Equity is the portion of your property that you outright own, free from any mortgage. With a lifetime mortgage, you’ll take out a loan secured against your home while retaining ownership of the property.