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After you’ve spent years working hard and paying off the mortgage on your family’s home, it may seem unfair to have to sell and downsize, just to free up cash for retirement. This is where a lifetime mortgage can be a good idea for some people.
In this article, we take a detailed look at the question Are lifetime mortgages a good idea, and the pros and cons of a lifetime mortgage.
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Are Lifetime Mortgages A Good Idea? – Pros and Cons
Are Lifetime Mortgages A Good Idea? Lifetime mortgages sometimes get a bad rap for being expensive or a scam. But for some people, they can be a good way to access a significant amount of money in later life, which will improve the quality of retirement.
They may be the only way to borrow money in old age, and if necessary, they can be a good solution. But before you make a decision, you’ll need to know the pros and cons.
What are the different types of lifetime mortgages?
There are a few variations of the standard lifetime mortgage. If you are considering using this type of equity release, you may want to compare different lifetime mortgage plans to find the right one for you.
The most common variations of the standard plan are:
- Interest Only Life Mortgage (or Flexible Life Mortgage)
- Enhanced life mortgage
- Lifetime mortgage with disposition
Who qualifies for a lifetime mortgage?
To qualify for a lifetime mortgage, you must be at least 55 years old. This age restriction applies to both people if you are applying for a joint lifetime mortgage. You cannot get a lifetime mortgage for those under 55.
The deal you’re offered, including the amount of principal you can free up, can differ significantly if you’re over 60, over 65, or want a lifetime mortgage for over 70.
In addition to the age restriction, you will also need to:
- You want to release tax-free cash from your primary residence where you usually live
- Have paid off all debts secured by your home, including any existing mortgages used to purchase the property
- Owning a home that exceeds a minimum appraisal (set by the lender)
- Owning a home that meets building regulations
- Own a home that meets other criteria, such as not being at risk of depreciation
Pros – Are Lifetime Mortgages A Good Idea?
The main advantage of a lifetime mortgage is that you can free up equity without having to move house, a great benefit if you’ve spent your working life paying off the mortgage on a beloved family home.
Other advantages include:
- Flexibility
- Access to cash when needed
Being able to stay still is a great benefit. However, if you decide to downsize at a later date, you may still do so, with your lender’s approval.
- Financing Your Retirement Goals
- Peace of Mind
Once you have your cash, you can spend it however you like. You are not required to use it for your home: you can go on vacation, finance a motorhome dream, or whatever you choose.
Cons – Are Lifetime Mortgages A Good Idea?
The main drawback of a lifetime mortgage is that the interest adds up quickly. Think about how people always say to start paying your pension when you’re young since compounding interest can make early contributions worth a lot; if so, you only owe the interest instead of benefiting from it. The problem is compounded by the fact that interest rates on a lifetime mortgage are typically higher than those on a standard mortgage.
Interest accrual
Let’s take a look at an example. Suppose you decide to release £50,000 of principal and agree to an interest rate of 6%. The following table shows what the loan balance will look like as interest increases:
| Year | Opening balance | Interest | Closing balance |
| 1 | £50,000 | £3,000 | £53,000 |
| 2 | £53,000 | £3,180 | £56,180 |
| 3 | £56,180 | £3,371 | £59,551 |
| 4 | £59,551 | £3,573 | £63,124 |
| 5 | £63,124 | £3,787 | £66,911 |
| 10 | £84,474 | £5,069 | £89,542 |
| 15 | £113,045 | £6,783 | £119,828 |
| 20 | £151,280 | £9,077 | £160,357 |
As you can see, this quickly eats up your home’s equity, and even with the negative equity guarantee and inheritance protection, your loved ones could end up feeling like they’ve lost. Of course, you are not required to leave any inheritance, that is your choice, but it is something to consider when weighing the pros and cons of a lifetime mortgage.
Possible inheritance tax liability
The other thing to consider when it comes to inheritances is any gifts you make with the cash you’ve freed up. We said earlier that you can use this cash for whatever you want, and while this is true, if you decide to give some to your family, you could be eligible for inheritance tax.
Impact on benefits
If you receive any means-tested benefits, it is prudent to investigate how the principal release might affect your entitlement. You may find that having a large lump sum in cash means you no longer qualify for certain benefits. Your broker can help you figure this out.
Charges and fees
Finally, it’s worth considering whether or not you want to pay off your lifetime mortgage early at any time, usually downsizing, and what prepayment charges you might incur if you decide to do this.
FAQ – Are Lifetime Mortgages A Good Idea?
Here are some frequently asked questions on are lifetime mortgages a good idea:
Are lifetime mortgages safe?
Yes, as long as you get expert advice beforehand, use a reputable lender, and check that the terms are right for you, then a lifetime mortgage shouldn’t be risky.
In the past, some people have run into problems where the accrued interest has meant that the debt has increased more than the value of the property and the beneficiaries have been left with no inheritance and a bill to pay. Today, lifetime mortgage products are much more transparent, and you need to be clear from the outset about what exactly your loan will look like 5, 10, or 20 years from now.
Most reputable lifetime mortgage products now also come with a negative equity guarantee, which means you never have to pay more than you sold for your home. Some also give you the option of reserving a percentage of your home’s value for your beneficiaries, guaranteeing them something to inherit. This is sometimes called inheritance protection.
What is the difference between a lifetime mortgage and a principal release?
A lifetime mortgage is a type of equity release and loan secured on your primary residence.
The other type of equity release is called a home reversion plan and involves selling a percentage of your property without having to move or pay rent.
Therefore, all lifetime mortgages are equity release plans, but not all equity release plans are lifetime mortgages.
Are Lifetime Mortgages A Good Idea?
Lifetime mortgages sometimes get a bad rap for being expensive or a scam. But for some people, they can be a good way to access a significant amount of money in later life, which will improve the quality of retirement.
Can I use a lifetime mortgage to buy a house?
The money you receive from a lifetime mortgage could go toward buying an investment property or helping loved ones buy their own property.
But it wouldn’t be wise to use a lifetime mortgage to buy another residential property to move into. Remember that a lifetime mortgage becomes repayable as soon as you leave your current property.
How much can you get in a lifetime mortgage?
The amount you can borrow on a lifetime mortgage will be determined predominantly by your age, as well as the value of your home. Not forgetting the individual lender and what they prefer to offer.
At best, the most you can borrow with a lifetime mortgage is capped at just under 60% equity in your home.
What happens if I die when I have a life mortgage?
When you die with a lifetime mortgage as the sole life mortgage holder or last surviving owner, your home must be sold, and part of the proceeds from the sale are used to pay off the debt.
However, nothing will happen if you die and someone else is listed on the lifetime mortgage who still resides in the property. The lifetime mortgage is only due when the last surviving owner dies or moves away.
What banks do lifetime mortgages?
UK banks rarely offer lifetime mortgages. Instead, lifetime mortgages are offered through insurance companies or dedicated principal release providers.
However, some banks have partnered with respected share release companies to recommend to their clients.
Can I rent my home when I have a lifetime mortgage?
Some relief providers will allow you to rent out a room or part of your home after you take out a lifetime mortgage, as long as you still live at the address.
You will not be able to take out a lifetime mortgage and then go out to rent the entire property. If you were to move, the lifetime mortgage would be paid off immediately.
Can you pay off a lifetime mortgage early?
Yes, it is possible to pay off the loan early, but this can lead to prepayment costs, which can be very expensive in some cases.
You can choose to pay your mortgage for life before you leave home or die. For example, you may have a windfall and decide to pay off debts so that the beneficiaries of your estate will inherit your entire estate.
However, doing so may incur early repayment costs. These costs may be a flat fee or may be subject to the rate of interest on British government bonds known as Gilts.
Other lifetime mortgage companies will reduce the fixed cost over time and even eliminate the prepayment fee altogether after many years.
Conclusion – Are Lifetime Mortgages A Good Idea?
Are Lifetime Mortgages A Good Idea? Lifetime mortgages sometimes get a bad rap for being expensive or a scam. But for some people, they can be a good way to access a significant amount of money in later life, which will improve the quality of retirement.