There is a reason lifetime mortgages are so popular. In fact, they are the most commonly used of all the equity release plans available. Lifetime mortgages are straightforward and very easy to understand. They also afford a good number of benefits to those homeowners who are in retirement but want some extra cash.
How a Lifetime Mortgage Scheme Works
Lifetime mortgages have an overall simple structure. You access the equity built up in your home and you can spend the cash you receive however you want.
A lifetime mortgage runs for the rest of your life, instead of a designated loan period, and while you are alive, you retain full ownership of your property. You stay in the home until you either pass away or move into long-term care. At that time, the home is sold, and the loan balance is repaid to the lender.
In most instances, you don’t need to make any repayments during your lifetime. However, there are some lenders who offer products that allow you to make repayments if you wish to do so. One of the most popular reasons for making payments is to limit the accrual of interest so an inheritance can be left behind to loved ones.
In a traditional lifetime mortgage scheme, the interest simply rolls up, or compounds, and is added to the loan. If upon the sale of the home, you still have a profit, those proceeds are distributed to your estate.
In terms of how you receive your equity payment, you have two choices. You can either receive the payment in one lump sum or you can choose to have the payments broken up into smaller amounts through a drawdown plan. There are benefits to both structures and one of our advisers could certainly assist in helping you determine which would be better for you. In both situations, the cash received is tax-free and you are free to spend it however you want.
Different Types of Lifetime Mortgage Schemes
Given how popular lifetime mortgages have become, there are now several different kinds available. Subsequently, by adding new features and enhancements, the use of lifetime mortgages has grown even more.
The original, most traditional lifetime mortgage is the one described above which doesn’t have a lot of bells and whistles. Basically, with the traditional plan, you receive a cash sum payment and don’t make any repayments. The interest compounds over time and the full balance is repaid when the home is sold.
However, there are also several new features and options now available, so there are now different kinds of lifetime mortgages.
Drawdown lifetime mortgage
A drawdown scheme functions just as it sounds. You have the ability to withdraw funds as you need them, either in addition to, or in place of a larger lump sum.
Enhanced lifetime mortgage
An enhanced lifetime mortgage typically offers a lower interest rate and a larger equity release if you qualify. In order to be eligible, you must have certain health or lifestyle factors that impact your expected life expectancy.
Voluntary Repayment Plan
Voluntary repayment plans allow you to make some payments toward your loan balance. Generally speaking, you are able to pay up to 15% of the original amount you borrowed without incurring any penalties.
Interest-only lifetime mortgage
With this scheme, you are able to make payments against you mortgage. Those payments are applied only to the interest that accrues. By doing this, you are able to keep your balance level with the original amount you borrowed.
How much to borrow?
If a lifetime mortgage sounds like a good investment to you, you’ll obviously need to know how much you can and should borrow. Every provider has their own set of borrowing rules that determine how much equity you can release. However, there are some universal factors considered when determining if you qualify.
You must be at least 55 years old. If you are borrowing along with a partner, this age restriction would apply to the youngest borrower. In addition, your property must be valued at a minimum of £70,000. And given that there are enhanced options offered by some providers, you’ll need to verify any potential medical conditions that would allow you to borrow more.
If you want to find out how much equity you’d be able to release, or want more information in general, please reach out to one of our qualified advisers for assistance. We can help you determine the best plan for you.