Mortgagerateslocal.com – Are you a homeowner aged 55 or over who wants to access some of the money tied up in your property without having to sell it or move out? If so, you might be interested in lifetime mortgage equity release, a type of loan that allows you to borrow against the value of your home and repay it when you die or move into long-term care.
Lifetime mortgage equity release can be a great way to boost your income, fund your retirement, pay off debts, or make home improvements. However, it is not a decision to be taken lightly, as it can have significant implications for your finances, your tax situation, your inheritance, and your welfare benefits.
We will explain what lifetime mortgage equity release is, how it works, what are the pros and cons, and what are the alternatives. We will also give you some tips on how to choose the best deal and what to consider before applying.
By the end of this post, you should have a clear idea of whether lifetime mortgage equity release is right for you and how to go about it.
What is Lifetime Mortgage Equity Release?
Lifetime mortgage equity release is the most popular type of equity release in the UK, accounting for more than 90% of all plans taken out. It is a loan secured against your home that you do not have to repay until you die or move into long-term care.
You can choose to receive the money as a lump sum, a regular income, or a combination of both. You can also choose to pay some or all of the interest on the loan, or let it roll up and be added to the debt.
The amount you can borrow depends on your age, the value of your property, and your health and lifestyle. Generally, the older you are and the more your property is worth, the more you can borrow. The average amount borrowed through lifetime mortgage equity release was £101,389.
Unlike a standard mortgage, you do not have to pass any affordability or credit checks to qualify for lifetime mortgage equity release. However, you do have to own your home outright or have a small mortgage that can be paid off with the equity release loan. You also have to live in your home as your main residence and maintain it in a good condition.
How Does Lifetime Mortgage Equity Release Work?
Lifetime mortgage equity release works by allowing you to borrow a percentage of the value of your home, usually between 20% and 60%, depending on your age and circumstances. You can choose how you want to receive the money, either as a lump sum, a regular income, or a drawdown facility that lets you take smaller amounts as and when you need them.
You can also choose whether you want to pay some or all of the interest on the loan, or let it accumulate and be added to the debt. If you choose to pay the interest, you can do so monthly or annually, or make ad hoc payments. If you choose to let the interest roll up, the debt will grow over time and reduce the amount of equity left in your home.
You do not have to repay the loan until you die or move into long-term care. At that point, your home will be sold and the proceeds will be used to pay off the loan and any interest. Any remaining money will go to you or your estate.
If there is not enough money to pay off the loan, you or your estate will not be liable for the shortfall, as long as you have taken out a plan that is approved by the Equity Release Council, the industry body that sets standards and safeguards for equity release products.
What are the Pros and Cons of Lifetime Mortgage Equity Release?
Lifetime mortgage equity release can have many benefits, but also some drawbacks. Here are some of the main pros and cons to consider:
Pros
- Lifetime mortgage equity release can give you access to a large amount of money that you can use for various purposes, such as supplementing your pension, paying off debts, helping your family, or improving your lifestyle.
- Lifetime mortgage equity release can help you stay in your home for longer, without having to downsize or move to a cheaper area.
- Lifetime mortgage equity release can be more flexible than other types of equity release, as you can choose how much you want to borrow, how you want to receive the money, and whether you want to pay the interest or not.
- Lifetime mortgage equity release can be more cost-effective than other types of equity release, as you only pay interest on the amount you borrow, not on the whole value of your home.
- Lifetime mortgage equity release can be tax-free, as the money you receive is not considered as income by the HMRC. However, it can affect your tax situation in other ways, such as reducing your personal allowance or increasing your inheritance tax liability.
- Lifetime mortgage equity release can be protected by the Equity Release Council’s standards and safeguards, which include a no negative equity guarantee, a fixed or capped interest rate, and the right to remain in your home for life or until you move into long-term care.
Cons
- Can reduce the value of your estate and the amount of inheritance you leave to your beneficiaries. This can be especially significant if the interest on the loan is compounded and the debt grows over time.
- Can affect your eligibility for some means-tested benefits, such as pension credit, council tax reduction, or universal credit. This can reduce your income and make you worse off in the long run.
- Can limit your options for moving house in the future, as you may have to repay the loan or transfer it to a new property that meets the lender’s criteria. This can restrict your choice of location, size, and type of property.
- Can incur high fees and charges, such as valuation fees, application fees, legal fees, and early repayment charges. These can reduce the amount of money you receive or increase the cost of the loan.
- Can be a complex and irreversible decision that requires careful consideration and professional advice. You should always seek independent financial and legal advice before taking out a plan, and involve your family in the process.
What are the Alternatives to Lifetime Mortgage Equity Release?
Lifetime mortgage equity release is not the only way to access the money tied up in your home. There are other options that may suit your needs and circumstances better, such as:
- Home reversion plan: This is another type of equity release that involves selling part or all of your home to a home reversion company in exchange for a lump sum or a regular income. You can continue to live in your home rent-free until you die or move into long-term care, but you will no longer own it or benefit from any increase in its value. Home reversion plans are less common than lifetime mortgages and tend to offer lower value than the market value of your home.
- Downsizing: This involves selling your home and moving to a smaller or cheaper property that meets your needs and preferences. This can free up some of the equity in your home and reduce your living costs, such as mortgage payments, maintenance, and utility bills. However, downsizing can also involve some drawbacks, such as moving costs, stamp duty, emotional attachment, and loss of space and comfort.
- Remortgaging: This involves taking out a new mortgage on your home to replace your existing one or borrow more money. This can allow you to access some of the equity in your home and benefit from lower interest rates or better terms. However, remortgaging can also involve some risks, such as higher monthly payments, longer repayment period, and stricter affordability and credit checks.
- Retirement interest-only mortgage: This is a type of mortgage that allows you to borrow money against your home and only pay the interest on the loan, not the capital. This can reduce your monthly payments and allow you to access some of the equity in your home. However, you will still have to repay the loan in full when you die or move into long-term care, which can reduce the value of your estate and the amount of inheritance you leave to your beneficiaries.
How to Choose the Best Lifetime Mortgage Equity Release Deal?
If you decide that lifetime mortgage equity release is the best option for you, you will need to compare different deals and find the one that suits your needs and circumstances best. Here are some factors to consider when choosing a lifetime mortgage equity release deal:
- Interest rate: This is the rate of interest that you will pay on the loan, either monthly, annually, or at the end of the term. The interest rate can be fixed or variable, and can have a significant impact on the cost of the loan and the amount of equity left in your home. You should look for a deal that offers a low and competitive interest rate, preferably fixed or capped, and approved by the Equity Release Council.
- Loan-to-value ratio: This is the percentage of the value of your home that you can borrow, depending on your age and circumstances. The loan-to-value ratio can vary from lender to lender and from plan to plan, and can affect the amount of money you receive and the amount of equity left in your home. You should look for a deal that offers a high and flexible loan-to-value ratio, allowing you to borrow as much as you need or want.
- Flexibility: This is the degree of choice and control that you have over how you receive and use the money, and how you repay the loan. Flexibility can include options such as drawdown facility, interest payment, partial repayment, inheritance protection, and portability. You should look for a deal that offers a high and flexible loan-to-value ratio, allowing you to borrow as much as you need or want.
- Fees and charges: These are the costs that you will have to pay to take out and maintain a plan, such as valuation fees, application fees, legal fees, and early repayment charges. Fees and charges can vary from lender to lender and from plan to plan, and can reduce the amount of money you receive or increase the cost of the loan. You should look for a deal that offers low and transparent fees and charges, and avoid any hidden or unnecessary costs.
- Customer service: This is the quality and reliability of the service that you will receive from the lender and the adviser, before, during, and after taking out a release plan. Customer service can include aspects such as communication, guidance, support, and complaints handling. You should look for a deal that offers excellent and trustworthy customer service, and check the reviews and ratings of the lender and the adviser.
What to Consider Before Applying for Lifetime Mortgage Equity Release?
Before applying for lifetime mortgage equity release, you should consider the following factors:
- Your needs and goals: You should think carefully about why you want to take out a lifetime mortgage equity release plan, and what you want to achieve with the money. You should also consider how your needs and goals may change in the future, and whether lifetime mortgage equity release will still suit them.
- Your financial situation: You should assess your current and future income, expenses, debts, and assets, and how lifetime mortgage equity release will affect them. You should also consider the impact of lifetime mortgage equity release on your tax situation, your benefits eligibility, and your inheritance.
- Your family and beneficiaries: You should discuss your plans with your family and beneficiaries, and explain how lifetime mortgage equity release will affect them. You should also consider their views and wishes, and whether they are willing to support you or contribute to your costs.
- Your health and life expectancy: You should consider your current and future health and life expectancy, and how they may affect your decision. For example, if you have a serious or terminal illness, you may qualify for an enhanced lifetime mortgage that offers a higher loan-to-value ratio. Alternatively, you may prefer to use other options, such as selling your home or using your savings, to make the most of your remaining time.
- Your home and location: You should consider the condition and value of your home, and whether it meets your current and future needs and preferences. You should also consider the location and environment of your home, and whether you are happy to stay there for the rest of your life or until you move into long-term care.
Conclusion
Lifetime mortgage equity release is a type of loan that allows you to borrow against the value of your home and repay it when you die or move into long-term care. It can be a great way to access some of the money tied up in your property and use it for various purposes, such as supplementing your income, paying off debts, or making home improvements.
However, it can also have some drawbacks, such as reducing the value of your estate, affecting your benefits eligibility, and limiting your options for moving house. Therefore, lifetime mortgage equity release is not a decision to be taken lightly, and requires careful consideration and professional advice.
