This type of equity release scheme is a mortgage that uses your home as collateral. Repayments are not made until after you have passed away, or moved into long term care. For this reason, they are often referred to as lifetime mortgages. There are many reasons why a lifetime mortgage might be attractive to a homeowner, who has paid off their mortgage and is over the age of 55, and many people prefer to use this type of equity release scheme as opposed to a home reversion plan.
Getting a lifetime mortgage
The lending criteria for lifetime mortgages can be strict. Lenders have their own rules and restrictions, but the following criteria are standard. The minimum age for someone to take out a lifetime mortgage is 55. The older you are the more you will be able to borrow; a 65-year-old will probably only be able to about 20% of the value of their property, whereas an 85-year-old can expect to be able to borrow as much as 50%. There are also minimum loan amounts (£10,000 tends to be the absolute minimum you can borrow in this way), which means that your home will have to be of a certain value for you to qualify for a lifetime mortgage scheme.
The benefits of lifetime mortgages
The main advantages are that you don’t have to make monthly repayments, and you will never have to leave your home. According to the terms of the agreement, you will retain full ownership of your property. For many people this is the key advantage that lifetime mortgages have over home reversion plans. If you are part of a couple, repayment will not suddenly be required if one of you passes away; the arrangement stays in place until the remaining partner has died.
Another important advantage is that you are likely to have the choice of whether you want to receive the money in a lump sum, or to receive small regular installments. This gives you the option to either spend the money on something large like a house extension or garage conversion, or to benefit from an increase in the amount of spending money you have in your day to day life.
Lifetime mortgages: things to be careful of
With a lifetime mortgage, you don’t have to make monthly repayments.
This means that you are paying interest on a value that is increasing all of the time, rather than decreasing – as is the case with a normal mortgage, which gets smaller and smaller as you make your repayments each month. So, in effect the interest snowballs: year on year the interest is compounded and you end up paying interest on your interest.
The end result is that borrowing money in this way is considerably more expensive in the long term than with a standard loan or mortgage. Although, it’s also worth remembering that, as guaranteed by the Equity Release Council, you will never have to repay more than the value of your property. If you decide that you would like to repay the mortgage off early, there is likely to be a charge for this, as lenders see this as a missed opportunity for them to make a larger profit later on.