Author: , CertPFS, CertCII(MP), CeRGI, CeLTM, CeRER
Last updated: August 3rd, 2022
A lifetime mortgage is a type of loan secured against your property. It is one way of boosting income in later life. Unlike a conventional mortgage, which runs for a fixed term; lifetime mortgages, as the name suggests, run for the rest of your life. They are the most popular form of equity release plan, enabling you to unlock cash from your home.
What is a lifetime mortgage and how does it work?
The idea of a lifetime mortgage is to enable you as a homeowner to take out a loan secured against your property which doesn’t require repayment until you die or go into long-term care. You are essentially borrowing a proportion of your home’s value and nothing has to be paid back while you are still living there.
A lifetime mortgage is one way of accessing the wealth tied up in your property in later life, without the need to downsize or move to an area where property is cheaper. It gives you tax-free cash to spend as you choose, while still enabling you to keep ownership of your home.
When you take out a lifetime mortgage your home still belongs to you and you are still responsible for its upkeep. You can only take out a lifetime mortgage if you are aged 55 or over.
So, what is the difference between equity release and a lifetime mortgage?
Equity release allows homeowners to access the money they have invested in their home. Read more about why people choose equity release in our previous blog post here. Equity release enables you to obtain a lump sum of money or a steady stream of income, or a combination of both.
A lifetime mortgage is one of the two main types of equity release products, the other is a reverse mortgage.
What is the difference between a lifetime mortgage and a residential mortgage?
There are several key differences between a lifetime mortgage and a conventional residential mortgage. Here are the most common ones:
Term of loan – there isn’t a fixed duration for a lifetime mortgage, whereas residential mortgages are for a set period of term (usually 25 years).
Monthly payments – there are no monthly repayments with a lifetime mortgage (the loan is repaid when your property is sold when your die or go into long-term care). With a residential mortgage, monthly payments are required until the end of the term of the loan.
Interest rates – lifetime mortgages have a fixed interest rate throughout the term. There are a variety of options from fixed through to variable with a residential mortgage.
How interest is charged – on a lifetime mortgage, interest is added to the amount you owe each month (known as ‘rolled-up’ or ‘compound’ interest). Residential mortgages are either repayment (monthly repayments include the interest charged) or interest-only (monthly payments only cover the interest charged).
Affordability – there are no affordability checks if you choose not to make monthly payments with a lifetime mortgage. For residential mortgages income and outgoings are assessed to ensure you can afford the mortgage repayments.
Want to know whether a lifetime mortgage is right for you? Read more in our blog post here, or contact us on 01903 890 660 for an informal chat, free of charge.