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Is a Lifetime Mortgage best for me?
Why consider a Lifetime Mortgage?
One asset which has almost certainly risen in value during recent years is your home. Indeed, compared to the price you paid for it years ago it is probably worth a small fortune now. In those countries where the property market is well developed, the value of the average home has increased by about 20 times during the last 35 years. If you get an up-to-date valuation of your home, its present-day value could surprise you, especially if you have not had your property valued for a while. Be that as it may, it does not help you if you cannot actually gain access to the money tied up in your home.
There are several ways to unlock the cash tied up in your property. You could move to a smaller home or to one of less value, perhaps by moving to another part of the country where property prices are lower, or even to another country. Such “downsizing” gives you the maximum value from your home, but there may be “downsides” also. For example, you might love the area in which you live, or you might consider that moving would cause too much disruption or be too expensive.
Assuming that your mortgage has been paid off, or, at least, almost paid off, a lifetime mortgage offers you another option. It is a serious step, however, and, before deciding on a lifetime mortgage, you should consider whether other savings or assets could be used preferably to fund your intended purchases or your retirement.
What is a Lifetime Mortgage?
A lifetime mortgage has been the most popular means of equity release for quite a while. (See Ways to Release Equity in your Home for a detailed comparison of the lifetime mortgage with other equity release methods.) Simply put, a lifetime mortgage is a way to borrow money against the value of your home without having to repay the loan as long as you live. There are no regular repayments of interest or capital, and you continue to be the legal owner of your property, and to live in it as normal. The loan and the interest thereon are repaid to the lender when your property is eventually sold. The stipulation is that your home must be sold as soon as you (and your partner in the case of a joint lifetime mortgage) die or move into permanent long-term care.
Lifetime Mortgage facts to consider
Before you sign the application documents for a lifetime mortgage, you should weigh certain facts, to see which way the balance tilts.
-- You can use the money released for any purpose.
-- If you move home before you (and your partner) die or move into permanent long-term care, you can usually move the loan to your new home.
-- You can sell your home at any time, in which case the loan must be repaid. Because a lifetime mortgage is a long-term arrangement, there may be a financial penalty for early repayment.
-- Regardless of how long you (and your partner) live, you should never owe more than the ultimate sales price of your property. Ensure that there is such a “no negative equity” clause in the documents you sign.
-- Your tax position could be affected, as could your eligibility for any means-tested State benefits.
-- Your heirs will inherit less, because the loan and the accrued compound interest will be deducted from your estate. (See examples below.)
These are the most important points to consider. There are others, and they vary according to the lender. You should talk to an independent financial adviser, if you are unsure of anything at all. You should also, of course, discuss the matter with your heirs.
Lifetime Mortgage examples
Property value = 250, 000
Loan = 100, 000
Your equity = 150, 000
Property is sold after 10 years
Loan interest rate = 6% (compounded monthly): After 10 years you owe 181, 940
Property value increase = 3% (compounded annually): After 10 years = 335, 980
You get 100, 000 now, and your heirs inherit your equity 154, 040 after 10 years
Loan interest rate = 6% (compounded monthly): After 10 years you owe 181, 940
Property value increase = 5% (compounded annually): After 10 years = 407, 220
You get 100, 000 now, and your heirs inherit your equity 225, 280 after 10 years
Loan interest rate = 7% (compounded monthly): After 10 years you owe 200, 970
Property value increase = 3% (compounded annually): After 10 years = 335, 980
You get 100, 000 now, and your heirs inherit your equity 135, 010 after 10 years
Loan interest rate = 7% (compounded monthly): After 10 years you owe 200, 970
Property value increase = 5% (compounded annually): After 10 years = 407, 220
You get 100, 000 now, and your heirs inherit your equity 206, 250 after 10 years
If you do not take a lifetime mortgage, you get nothing, and your heirs inherit the full value of the property. The maximum amount you can borrow depends on your (and your partner’s) age. The greater your age (or the age of the younger partner) is, the more money you can borrow. If you wish to bequeath a minimum estate, you can apply for the maximum amount as a lifetime mortgage, and enjoy the rest of your life on the equity released.
