Are you considering a lifetime mortgage? If so, this helpful guide should be ideal for you! Featuring important information which you should consider before applying for a lifetime mortgage.
Equally this section also features great tips, hints, general advice and more. Our aim is to inform members of the British public, to help them make more knowledgeable financial choices.
How does a UK Lifetime Mortgage Work?
People decide to select lifetime mortgages for all sorts of reasons, usually your lender will lend money to you and secure this against your home, as long as its your main residence. You’ll retain ownership of the home and when you die or move into long-term care, your home is sold and the money from the sale is used to repay the loan.
If you have any money left after the loan has been repaid, this typically goes to any beneficiaries of your estate. In addition, if your estate can ‘pay off’ the loan without selling the property, this can also happen too. However, should your home ‘decrease’ in value or your estate doesn’t provide enough money to repay the loan, your beneficiaries normally must repay any extra amounts. You’ll need to read all documentation carefully to see how this applies to you.
You’ll may find that most providers will include a ‘no-negative-equity guarantee’ as part of your lifetime mortgage. In basic terms, this guarantee that the lender promises to you and your beneficiaries, they will never have to pay back more than the value of the home.
In addition, you should also be ware, that in most cases interest is charged from the first day of the agreement, this will be added to your total loan amount. However, it’s no uncommon for some providers to have interest-free periods, this can be months or even years and it depends massively on which lender you use.
Are there different types of Life time Mortgages?
Yes they are, in England there’s typically two types to choose from, however before you select which one is right for you, you need to consider the following.
Typically, when somebody takes out a lifetime mortgage, they can choose to borrow a lump sum at the start of the term or a lower loan amount with the option of a ‘drawdown’. This can be good for people who want regular or small payments to ‘top up’ their lifestyle or income. This can also be good if you’re worried about the interest, as you’ll only pay interest on the money you need, rather than one large loan.
Here’s the two different types of Life-time mortgages in England:
- Interest Roll-Up – This type means you don’t have to make regular payments, you basically get a ‘lump sum’ or are paid a regular amount, you’ll also normally get charged interest which is then added to your loan total. The amount you loaned, including the ‘rolled-up interest’ is repaid at the end of your mortgage term, when your home is sold.
- Interest Paying – Typically you’ll receive a ‘lump sum’, but you can also make monthly payments or pay on an ‘ad-hoc’ basis. This is designed to reduce the impact of the interest. You’ll have to check with your provider if they’ll also allow to pay off capital, or if you’re just allowed to pay off the interest. Similar to an Interest Roll-Up, the amount of money you borrowed is ‘repaid’ when your home is sold at the end of your mortgage duration.
How much does it cost?
Of course, this question depends on the type of property you purchase, the lender you select and the type of mortgage you choose.
As with most things in life, you should be aware of all the costs which may affect your financial life before accepting any agreement, these can include:
- Legal fees and valuation charges
- Agreement fees with your lender
- Buildings insurance
- If you’re using an independent advisor, you’ll have to pay their fees
- Normally there’s a ‘completion fee’ as well. This tends to be paid at the point of completion, hence the name or it’s added to your mortgage
- Depending on your mortgage provider, you may have to pay a ‘financial penalty’, should you ‘pay off’ your loan earlier.
- You should also consider whether your home is likely to ‘increase’ or ‘decrease’ in value. Should you die and your home decreases, your mortgage may not be paid off in full. Will your estate be able to cover any shortfalls, should this situation occur?
It’s always recommended to read all the documentation and terms and conditions before you ‘agree’ or ‘accept’ any mortgage offer. In most cases its certainly advisable to speak to an independent financial advisor to assess your situation. As we all have different circumstances and requirements, what might be correct for one person, may not be for another.
Is it correct for your situation?
Unfortunately, nobody is in the correct position to answer this question but you. As this is a ‘general guide’, we’ll attempt to highlight some things you should think about:
The lender you use, will generally expect you keep your property in ‘acceptable’ condition. This terminology can vary, you’ll need to double check all terms and conditions to see what acceptable entails.
Life time mortgages may affect the level of inheritance you leave to beneficiaries.
If you select a ‘interest roll-up mortgage’ you may find it ‘grows’ faster than you expected. This can mean you may eventually owe more money than the worth of your home.
You should attempt to find a mortgage with a fixed-rate if possible. Typically, variable interest rates can ‘increase’ as well as ‘decrease’. We’re currently in an historic low with interest rates, so the likelihood is they’ll only increase in the future.
You should always get independent finance advice if you’re unsure, life-time mortgages can affect means-tested benefits and tax situations.