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Ian Symmonds from Easy Street joins the Mortgage & Protection Podcast to talk all about mortgages for contractors.
Whether you’re buying for the first time, moving, investing or remortgaging we’ve got it all covered.
With people living longer in retirement, lifetime mortgages can play a key role in supplementing a person’s income. They can also be useful in providing early inheritance for families – the so called ‘Bank of Mum and Dad.’
Lifetime mortgages can also be a potential option for people have come to the end of their interest only mortgage.
However, lifetime mortgages aren’t suitable for everyone. Getting specialist advice and carefully considering all of your options before proceeding will make sure you get the right result.
What is a lifetime mortgage?
A lifetime mortgage is a type of mortgage that is designed to be repaid in the event of death or moving in to long term care.
Like a standard mortgage, a lifetime mortgage is simply a charge against your property. It does not involve you selling any part of your property (as is the case with Home Reversion Schemes).
You therefore retain full ownership of your property and have full rights to reside there until you sell, move into long term care or pass away.
What makes a lifetime mortgage different is the repayment and drawdown options.
You can either choose to make monthly payments or allow the interest to ‘roll up.’ You can potentially take the funds as a lump sum, a monthly ‘income’ or a combination of both.
There can also be an option to ‘drawdown’ further funds at pre agreed limits, depending on the option selected.
Who qualifies for a lifetime mortgage?
Lifetime mortgages are for homeowners who are generally aged 55 and over.
Another key factor is how much equity is in your property. Whether you choose to make monthly interest payments or not, the lender has to allow for the fact that you may choose not to in the future.
Due to the ‘no negative equity guarantee’ given by most lenders, they need to protect themselves, should you choose to let the interest roll up and you live for a long time.
This essentially means that the younger you are and the less equity you have in your property, the less you will be able to borrow. Any personal income isn’t usually taken into account when calculating how much you can borrow. It’s simply your age and the property value which are the main factors.
Another key point is the property type. If you own a leasehold property, this may affect how much you can borrow on a lifetime mortgage. This is particularly the case for properties with relatively shorter leases. Other challenges may be properties with restrictions such as retirement apartments.
The condition of your property is also a key factor. The lender will carry out a survey which will dictate a) the value and b) whether it is suitable security for the loan.
How much can I get on a lifetime mortgage?
There are two main factors that lenders consider when calculating what you can potentially borrow –
- Your age
- Your Property Value
Each lender will have criteria which dictates the maximum loan to value (LTV) they will consider based on a person’s age.
For example, if they consider lending 25%ltv for a 55 year old who owns a property worth £200k, the potential maximum loan would be £50k.
Again, the property type and condition will also be factors. For example, in addition to leasehold properties and restricted properties, some lenders may not lend on certain type of construction such as steel framed properties.
Can I get an interest only lifetime mortgage?
It is technically possible to get an interest only lifetime mortgage, but there are differences to a standard interest only mortgage.
With standard mortgages or retirement interest only mortgages, you have to make a monthly interest payment. This means that if you don’t make payments, you would be in arrears. If you did this for a long length of time, this could lead to default, CCJs and ultimately repossession.
This is different with lifetime mortgages. Rather than being contractually obliged to make the monthly interest payment, you are ‘electing’ to make the payment. This means that if you don’t make the payments, you won’t be an arrears, but it would trigger the roll up of interest.
Do you pay monthly for lifetime mortgages?
This depends on the option you select.
If you elect a full interest only lifetime mortgage, you would pay the full amount of interest every month.
It is potentially possible to have a part interest, part roll up option. This means that you are only paying what you feel you can afford in monthly payments and reducing the effect rolled of up interest.
If you elect to let the interest roll up, you would not have to make a monthly payment. However, you would need to carefully consider the effect that this would have on the value of your estate, should you wish to leave anything to your beneficiaries.
With the rolled up interest option, it may be possible to have an overpayment facility. This would work similarly to a standard mortgage where you can pay a certain amount of the capital off each year without penalty (for example 10% of the loan).
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How much do you pay back on lifetime mortgages?
If you choose to make an interest only payment, the monthly amount will depend on –
- The interest rate
- The loan amount on which you have elected to pay the interest
If you choose to let the interest roll up, the total amount paid back will depend on –
- The interest rate
- The length of time before the loan is repaid
For both options (or a combination of the two), the total amount repaid at the end will depend on when the loan is repaid. As the plan is to usually remain in the property until death or moving into long term care, the exact timing and therefore the total amount paid back will be unknown.
Personalised illustrations should include details of the interest rate and some examples of the impact of rolled up interest over different timeframes.
There may also be early repayment charges. This will depend on the product selected and the details will also be included in your illustration.
If your lender offers a ‘no negative equity guarantee’ you will never owe more than your property is worth.
Can you pay back lifetime mortgages?
As with any type of standard mortgage, you can pay a lifetime mortgage back at any time.
However, an important thing to bear in mind are potential early repayment charges. These will vary depending on the lender / product and will be detailed in your personalised illustration.
Some lenders will have variable early repayment charges and some will have fixed. Fixed early repayment charges are more transparent and therefore generally preferable.
However, if you have plans to repay a lifetime mortgage early (i.e. prior to death or moving into long term care), you should really consider whether this is the right approach. Lifetime mortgages should not be viewed as a short term solution.
What is the difference between a lifetime mortgage and equity release?
Equity release incorporates both lifetime mortgages and home reversion plans.
Lifetime mortgages work the same way as standard mortgage in terms of ownership. You still retain complete ownership your property, but there is a legal charge by way of a mortgage.
Home reversion plans involve selling part of your property. This approach may be useful for people who can’t borrow as much on a lifetime mortgage due to the criteria. However, specialist advice is required for this type of product.
Please note, at Easy Street, we only advise on lifetime mortgages.
What can I use lifetime mortgages for?
Lifetime mortgages can be used for many purposes.
Examples include –
- Paying off an existing interest only mortgage
- Income in retirement
- Gifting money to family
- Holidays or holiday homes
- Restructuring finances
- Purchasing a new home
Each person’s reasons may vary, but there are generally no restrictions on what the money can be used for.
What are the risks with lifetime mortgages?
In recent times, the equity release sector which includes lifetime mortgages, has become heavily regulated. Practicing standards have also vastly improved with the help of the Equity Release Council.
This is good news as it protects borrowers against concerns such as losing ownership or the right to live in their homes.
However, lifetime mortgages do still come with risks that need to considered.
These include –
- Reducing the value of your estate
- Reducing the inheritance for your beneficiaries
- Taking on a long term debt which may not be very flexible
- Potentially having a monthly payment to service
- Reducing the availability of means tested benefits
What are the alternatives to lifetime mortgages?
Firstly, you need to consider whether taking out a mortgage is the right approach.
Alternatives to a mortgage could include –
- Moving to a cheaper area
- Assistance from family
- State benefits
- Renting out a room
- Taking a part time job
If some or all of these aren’t suitable for you, then a mortgage might be the right option.
If so, the main options are –
- Standard mortgage for older borrowers
- Retirement interest only mortgage
- Lifetime mortgage
How can a mortgage broker help?
Speaking with a specialist broker who has experience in dealing with mortgages for older borrowers is key to making the right decisions.
Some people assume that ‘equity release’ is their only option. However, this is usually not the case.
You need to consider the alternatives and if a mortgage is the right thing to so, you need to consider all of the options available to you. Whether it’s a standard, retirement interest only or a lifetime mortgage, a specialist broker will give you the advice you need.