Lifetime mortgages are similar to standard mortgages in that a loan is taken out which is secured against your property. You are using the value of your home as security for borrowing money. The loan (and any interest charged) is repaid out of the future sale of the property, usually when you pass away or go into long-term care (or if you are a couple, until the survivor passes away or goes into long-term care). The main difference is that with a standard mortgage you make regular contractual payments in order to repay the mortgage in full over a set period of time, whereas with a lifetime mortgage you can release a large sum of money and are not required to make any monthly payments at all. Instead, the interest is added to the loan and is repaid when you go into long-term care or pass away, which as the name suggests, is at the end of your lifetime.
Over time the loan will increase in size, however, this can generally be offset by future increases in your property’s value. For example, the value that you purchased your home is usually a lot less than it's current value, which means that your property has increased in value over time and will usually continue to do so. Speaking to a specialist adviser will help you understand how much your property is increasing in value by each year, and what effect a lifetime mortgage would do to your equity in the property.
There are many different variations of lifetime mortgages, however the most common variations are:
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Lump Sum (Roll-Up)
These are the simplest lifetime mortgages to understand. A lender provides you with a lump sum of money and this loan is secured against your property's value. Interest compounds on the lump sum amount, as well as on top of any interest charged. Interest will keep compounding until the loan is repaid from of the future sale of the property. Whilst you may be able to access further funds in the future, you would need to take out a new lifetime mortgage to do so.
In recent years, the Lump Sum plans have evolved into more flexible products. Products that offer a drawdown facility are similar to Lump Sum products, however they also offer the flexibility of accessing further funds in the future should you require them.
An initial lump sum is provided by the lender and interest compounds on the lump sum amount, as well as on top of any interest charged. However, a pre-agreed amount of money is set aside to be accessed when you require it. Only then is interest charged on this additional amount, at the lenders prevailing rate at the time (as well as on the initial lump sum). By having a drawdown facility available to you rather than accessing a larger initial lump sum, you can help mitigate any negative effects to your state benefits as well as help reduce the erosion of equity against your estate.
Interest only (and interest-payment) variations of lifetime mortgages allow you to reduce the erosion of equity against your property. The lender allows you to make repayments to your lifetime mortgage, similar to the way in which a standard mortgage works. By making voluntary payments, you can ensure that the amount you owe will not increase (full interest payments) or will even reduce in size (capital & interest payments). If your current mortgage is coming to an end, interest-only lifetime mortgages allow you to keep making payments to maintain the size of the mortgage as you have been doing, but will also give you the flexibility of reducing or stopping your payments altogether in the future.