What are Lifetime Mortgages?
As the name suggests these schemes are mortgages secured on a property. If you are aged 55 or over there are a number of lenders who will lend money, typically based on age and property value, on an interest only basis with no need to repay the debt (capital) until your property is sold. This can be when you choose to sell but is typically on death.
Releasing equity through one of these mortgages now gives you the choice of:
- Fully covering the interest payments and no increase in debt
- No repayments and full “interest roll up”
- Partial interest repayments and a “slowing” of the effect of rolled up interest
The loan can be in the form of a single lump sum or ad-hoc drawdowns of smaller lump sums. Interest is only charged on the amounts actually released to you.
Interest is added to the loan monthly or yearly, but you are not required to make any repayments during your lifetime. The eventual debt, including rolled-up interest, is repaid from the sale proceeds when the house is sold. Any surplus from the sale goes to your assets or estate.
At today’s typical interest rates the debt on a single lump sum scheme will roughly double in ten to twelve years – this is known as the compound interest effect. If house prices rise this effect can be fully or partially offset. However if house prices fall the percentage of the property value that is accounted for by the lifetime mortgage may rise much more quickly.
It is entirely possible that the debt could eventually grow to reach the value. If a ‘no negative equity’ guarantee applies than the debt will stay level with the value but all of the equity will have gone and there would be no surplus for your estate.
A recent variation on this type of mortgage allows borrowers to meet some (typically subject to a minimum payment of £25 per month) or all of the monthly interest payments. By meeting all of the interest payment the debt will remain constant, however if only part of the interest payment is met the increase can be slowed down when compared to a “rolled-up” scheme.
These types of equity release plans are particularly useful for those people who are reaching retirement with an existing ‘interest-only’ mortgage but for which they do not have a vehicle to repay the loan. They can transfer the debt to a lifetime arrangement and never have to worry about a fixed repayment date.
Additionally, if the repayments become unaffordable (for example if one of a couple dies and their income dies with them) the loan can instantly be switched to a ‘roll-up’ of interest from that point, again for life.
If you wish to guarantee that at least some part of your home value is left to children or beneficiaries then some schemes allow you to protect a given proportion of the initial value. For example, if you protected 10% of the value of your home, then the total debt would never exceed 90% of the value at any time in the future. When you leave the property and it is sold, you or your estate will get at least 10% of the net sale.
If you would like to learn more about your options for an interest-only lifetime mortgage, please use the ‘Contact Us’ tab at the top of this page.