Are you heading for your older years, but want to free up some equity to enjoy life while you are still fit and healthy? Or even an ‘elderpreneur’ (indeed, that word does exist!) who wants to start your own business, and would be grateful for some funds to set you up? If you do not want to break into your savings or alter your pension plans, you might have considered a lifetime mortgage.

We last spoke about mortgages, more specifically remortgaging, back in February. But we know an awful lot could have changed in your lives since then. With energy bills rising, a growing shortage of fuel and supplies, and more impact from the pandemic gradually coming to the fore, we certainly have plenty to think about day to day.

One area in which Simpson Financial Services can take care of all the thinking for you, is if you’re considering mortgaging a property in later life.     

Your family have possibly flown the nest. You could be nearing retirement. And many things around you just look as though they could do with an update. Or you might feel you need a fresh start as you go through separation, divorce, bereavement, or starting life with a new partner.

Any of these scenarios could prompt a review of your life and your financial circumstances. Which is why seeking new finance options in later life is a common occurrence.

Although not for everyone, here you will learn about the differences between a standard mortgage and a lifetime mortgage, which we hope you will find useful as a starting point.

What are the differences between a standard mortgage and a lifetime mortgage?

Standard Mortgage

We use the term ‘standard mortgage’ here simply to reflect the difference between this and a lifetime mortgage. There are various mortgage products available, for which you can find out more information from one of our specialist Mortgage Advisors.

For the purpose of this post though, a standard mortgage is an amount of money borrowed from a mortgage provider (lender), to help you pay for a property. In essence, it is a loan which is repaid over a set period of years (usually 25 years from the outset), and at an agreed rate of repayment.  

The mortgage lender will require a deposit to be paid by you (minimum of 5% of the property value), which when added to the mortgage amount equals the total value of your property.

Interest is also added to your mortgage balance throughout the term of the mortgage. So, as with any interest-bearing loan, you will pay back more than the initial mortgage balance. The amount of interest paid is dependent on the type of mortgage, fixed or variable interest rate, whether you opt for interest only or full repayment, and obviously on the rate of interest itself.

At the start of the mortgage repayment period, you will generally be paying more interest than capital. And towards the end of the term, you will pay less interest and a greater proportion of the remaining capital balance.

The mortgage is secured against your property until the lender has received the final payment, and the mortgage is then settled. Only at this point, does ownership of the property transfer to you.

This is one of the distinct differences between the standard mortgage and the lifetime mortgage.

When you move home, you may be able to ‘port’ your existing mortgage, so it basically moves with you. You may have to increase your borrowing, change product and possibly mortgage lender aswell. Or, if you are downsizing you may be in a position to settle your current mortgage in full or at least make a lump sum payment.

Always establish any early repayment penalties before making your decisions. And if in doubt, seek professional advice.

You may also be in a position to ‘remortgage’ and release further funds against the value of your home if you meet the lender’s criteria. Speak to us if this is an option you would like to investigate further.

Lifetime Mortgage

Lifetime mortgages, also known as Equity Release Mortgages, are designed so you can release some of the equity within your property, from the repayments you have made over the years, similar to a remortgage.

Contrary to popular belief, you do not have to own your property outright in order to take out a lifetime mortgage. But you are likely to be offered a better deal if you have cleared a greater portion of the balance and interest.

How does a lifetime mortgage work?

  • There are strict qualifying criteria for a lifetime mortgage. As well as the minimum age requirement, which is usually 55 or 60 years of age, the older you are the more you can generally borrow. So, for instance at 65 you can usually borrow 20-30%, going up to 50% for older applicants.
  • Most lenders set a minimum loan amount which can vary between £10,000 and £45,000. And your property must also meet valuation criteria upwards of £70,000.
  • As opposed to a standard mortgage, you are only required to repay the capital on sale of the property, upon your death, or when you enter long-term care. Some plans allow for capital repayments in addition to the interest, leaving a much lower balance upon final settlement, but this is not essential. In fact, the whole point of a lifetime mortgage is that you can use the equity release without the pressure of immediate repayments.
  • Interest Payment Lifetime Mortgage – interest is accrued on a lifetime mortgage, but with this type of mortgage, it is paid during the term.
  • Lump Sum Lifetime Mortgage is an ‘interest roll-up mortgage’ which calculates the interest during the term, but does not call for payments until the property is sold. The rate of interest repayable is usually fixed at the start of the mortgage term.

Any remaining funds can be used for your care fees, or allocated to your beneficiaries.

Of course, this will be made much easier for all those involved if you have already taken care of your Estate Planningand you have a Will in place.  Your estate will then be divided amongst your beneficiaries according to your personal wishes, and it will remove any concerns you or they may have when the time comes.

Another benefit of a lifetime mortgage is the reduction in your Inheritance Tax Liability.

  • Drawdown Lifetime Mortgage – some lenders offer the option of a ‘flexible lifetime mortgage’ which allows you to take out a lower equity amount at the start of your mortgage, and then withdraw further funds as and when required.

The benefit here is that you still only pay interest on the total amount borrowed, so your final settlement could be much less than other lifetime mortgages.

A lifetime mortgage is not always the most appropriate option for everyone. And as with all things in life, for every yin there is a yang. So, for every benefit there will also be pitfalls and considerations, I’m afraid.  

Lifetime Mortgage considerations

  1. Whilst you can draw on the value of your property now, you must also appreciate that this will leave a lesser value to your estate on your death. Your beneficiaries will therefore receive a reduced inheritance.
  2. The principle behind the lifetime mortgage is that the advance is fully repaid through the sale of the property when you move out. This could be upon your death or when you enter full-time care. But it means you are no longer able to pass the property to beneficiaries and a beloved family home has to be sold.
  3. It is vital that you fully understand the payment structure, and the possibility of negative equity if you choose a mortgage without regular interest payments. The last thing you want to do is risk leaving your loved ones with additional payments to make up any shortfall to the lender.

There are ‘no negative equity’ clauses and as regulation around lifetime mortgages is tightening up, it is becoming more secure. But we would advise you to consider all pros and cons.

  1. In addition to potential losses, be aware of professional expenses involved, such as those charged for a standard mortgage – legal fees, valuation costs, and arrangement fees.
  2. And finally, a lifetime mortgage could also impact your benefits through the means-testing process.  

Is a lifetime mortgage the best option for you?

By the time you reach midlife and beyond, you may well have had a variety of mortgage products. But you might not necessarily have always chosen the best product for you at that time, or even known about the choices available.  

This is just one of the reasons why it is so beneficial to seek professional and independent financial advice whenever you are making any major financial decisions, at any stage during your life. Particularly when looking into such products as a lifetime mortgage which may benefit you right now, but will have significant impact on the value of your estate and what is available for your loved ones further down the line.

Although we can provide you with generic information, and arrange for further discussions with our Independent Financial Advisers around your specific financial circumstances, this post has not been published with the aim of encouraging you to take any one product in favour of another.

It is vital that you consider your entire financial portfolio and seek independent advice to enable you to make an informed decision.

So, if you are in any doubt or would like to discover more about a lifetime mortgage or any of our other financial servicesat this stage in your life, please contact one of our friendly team for a free initial consultation. Let us take some of the pressure of your financial planning and arrangements, and make the rest of your life the best of your life!