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A lifetime mortgage can be an excellent way to access equity in your home and maximize its potential. It could be used for home improvements, helping children purchase their first property or supplementing retirement income in retirement.
Before taking out a lifetime mortgage, it’s essential to comprehend both its advantages and potential drawbacks. Since this is such an important decision, seek professional advice before making any final decisions.
Interest-only
An interest only lifetime mortgage is an equity release option suitable for people aged 55 or older. It allows borrowers to release part of the equity locked up in their home, releasing it for whatever purpose they desire. However, as with other equity release methods, they must pay back the interest each month.
Lifetime mortgage lenders consider various factors when determining how much to loan you, such as age and property value. They may also take into account your credit history and overall health condition.
They typically offer loans at around 4.5 times your income, and they need to ensure you can afford to repay it each month. To do this, they take into account any pension income, savings and benefits you receive as well as interest payments to determine your monthly income and repayment capacity.
If you fail to make your monthly payments or keep up with them, the lender has the right to take back ownership of your home when the term ends and sell it in order to recoup what is owed.
Repaying a lifetime mortgage can result in an enormous lump sum, especially if you leave it unpaid for an extended period. This could pose problems if you have children or other relatives who would benefit from access to the equity in your home; otherwise, their inheritances could be affected negatively.
Some borrowers opt to have the interest charged on their lifetime mortgage roll up slowly, allowing them to make smaller payments each month and prevent debt accumulation. While this approach may provide assurance of inheritance protection, managing it on a monthly basis proves more challenging than having your interest charged at once.
Before committing to a lifetime mortgage, it is wise to consult with a comprehensive market advisor. They can guide you towards the most advantageous interest only lifetime mortgage for your individual situation and identify lenders offering competitive interest rates so that you do not pay more than necessary.
Drawdown
A drawdown plan is the most common type of lifetime mortgage, offering greater flexibility than a lump sum plan and releasing cash as needed. This could be for covering expenses as you retire or just extra spending money. Unfortunately, drawdown plans tend to be more costly and riskier than their lump sum counterparts.
With a drawdown lifetime mortgage, you have the flexibility to access your equity whenever and however needed, while interest only accrues on the money withdrawn. This means your monthly interest payments will be smaller than with a lump sum plan, potentially helping you save on overall costs of borrowing.
This plan is ideal for those struggling financially as they near retirement. It can provide a practical way to supplement your income and make the most of any means-tested benefits received in later life.
When selecting an insurance plan, it’s essential to speak with an expert adviser about which one best fits your individual situation. They can guide you on whether this option is suitable and provide details about its costs and potential hazards.
Another key benefit of a drawdown plan is the possibility to keep some money in reserve for future use, up to the maximum allowed by your lender.
These funds can be used for unexpected bills, home improvements or specialist care. You may even release some of the money so your family has a cushion when you pass away.
You may opt for a drawdown plan with no negative equity guarantee, which prevents your lender from chasing you should the property sell for less than its original financing. This provides peace of mind and may mean your family is debt-free when you pass away.
Many older homeowners find a drawdown plan to be an advantageous solution. As it allows you to release the equity from your property gradually, it allows you to adjust according to changing needs as you age and avoid missing out on means-tested state benefits.
Transferable
Lifetime mortgages are an attractive way to access some of your home’s equity. Money can be released as either a lump sum or in smaller, regular payments. You can use it for paying off existing debt, making home improvements or gifting it to family members.
The amount of money you can borrow depends on your age and the value of your property. Some providers might provide larger sums if you have certain medical conditions or have had previous health issues.
With a lifetime mortgage, you have the flexibility to borrow as much or little money as desired. However, the maximum loan amount available is set by the lender and there are usually strict eligibility criteria to meet. Furthermore, it’s important to think about how you will repay the loan once it comes due.
Interest is payable on money borrowed and rates can be fixed or variable; however, they should be capped by the Equity Release Council to prevent costs from spiraling too high. Furthermore, make sure your provider offers a no negative equity guarantee, meaning that whatever amount owed never exceeds your home’s value when sold.
If you’re thinking about taking out a lifetime mortgage, consult an adviser or mortgage broker who specializes in equity release schemes. They will give you objective advice and find you the most advantageous deal for your requirements.
If you are moving, transferable lifetime mortgages can be a great option if the new property meets the lenders’ lending criteria. Furthermore, consider whether you qualify for downsizing protection which means that if you repay the lifetime mortgage without incurring any early repayment charges, there will be no early redemption fees attached.
The amount you can borrow with a lifetime mortgage depends on both your age and the value of your home. Generally, the older you are, the greater amount available for borrowing.
You may wish to consider a home reversion scheme, which allows you to sell part or all of your house in exchange for a share of the proceeds. These products require more complex calculations than lifetime mortgages, so it is wise to seek independent financial advice prior to making such a commitment.
Early repayment charges
Lifetime mortgages are designed to be repaid upon the sale of your property, entry into long-term care or death (of either partner for joint applications). However, if you decide to repay your lifetime mortgage before these events take place, there may be early repayment charges applied.
Fortunately, there are ways to avoid early repayment charges on lifetime mortgages. These include using a fixed rate ERC period which may only last eight years or selecting an equity release plan that does not include early repayment fees.
Some equity release plans offer a significant life event exemption, which allows you to repay your balance if the primary borrower passes away or enters permanent long-term care. This voluntary feature could be an advantageous factor when choosing an equity release plan.
It’s essential to remember that these features can be expensive, so they should only be utilized in special circumstances. For instance, if you need to downsize or move into a smaller home due to medical reasons.
Another unique feature is voluntary repayments, which offer you an effective way to pay off your lifetime mortgage debt faster. You’ll have the ability to make annual voluntary payments that could amount up to 10% of your loan balance each year.
Voluntary repayments are an efficient way to pay off your loan faster and save your beneficiaries money on inheritance taxes, but you must use them responsibly. Some lenders have limits on how many voluntary payments you can make each year and will restrict when you can start making them.
If you’re searching for an equity release plan with voluntary repayments, it’s wise to shop around to find the best deal. Speaking with an expert equity release broker can also be beneficial as they can advise on which option is most suitable for your circumstances and budget.
Finally, you may want to consider a lifetime mortgage plan with downsizing protection, which allows you to sell your current home and purchase another without incurring any early repayment charges. This can be especially advantageous if you plan to downsize to a lower-value property after five years.
