Interest-only mortgage

A lifetime mortgage differs somewhat from a traditional mortgage where interest is concerned. When you take out a traditional mortgage, you will be charged interest on an ever-decreasing sum – each month you make a mortgage repayment, the amount you owe is lessened.

In contrast, a lifetime mortgage sees you being charged interest on an increasing amount. This means that the debt becomes greater over time. The reason for this is that you will not be making repayments but a predetermined amount of interest will still be added.

Taking out a mortgage as your near the age of retirement is a lot a more difficult than in previous years of your life, however, a lifetime mortgage, often referred to as a retirement mortgage, allows you to borrow money that is secured against your property.

You will pay interest payment during the term of the loan but the full amount is taken at the end of the term – this happens when the last person on the agreement either moves into care or passes away. Any remaining funds from the sale of your property will go to your estate.

Unlike many traditional mortgages, which tend to have a rate of interest that can fluctuate, lifetime mortgages usually come with a fixed rate. There is an option to take out a variable lifetime mortgage but this is not preferred as it can be less certain.

One of the upsides of this type of mortgage is that you will never be expected to repay an amount higher than the value of your home.

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How Do You Take Out A Lifetime Mortgage?

Taking out a lifetime mortgage will require you to undergo some strict checks. One of the first criteria you must meet is the minimum age, this is usually between 55 and 60 years old. Your age will determine how much you can borrow and this is normally calculated as a percentage of your property. For those who are 65, 25-30% is usually offered, however, as your age increases, so too, does the amount you are eligible to borrow.

Another consideration is the minimum loan amount. Depending on the lender this can be as low as £10,000 but in some cases, it can be much higher, with an average of around £45,000.

In order to comply with this minimum loan amount, the value of your property must also meet minimum criteria, for the most part, this is between £70,000 and £100,000.

It is also important to keep in mind that taking out this type of mortgage will depend on your credit rating and history and whether you are currently able to afford to commit to this. Since a lifetime mortgage is secured against your home, failing to meet the repayments could put you at risk of losing your property so it is essential that you take this into consideration before making a commitment.

You must also consider the documentation that will be required when applying for this type of loan – if you are not yet retired, you will need a copy of your P60 and you pension forecasts from both state and private pensions. If you are self-employed, you will need to provide your lender with details and evidence of your last three trading years.

In contrast, if you have retired, different documentation will be needed, this may include:

• A P60 from all of your pension schemes
• The last letter from the DWP (department of work and pensions)
• Three months worth of recent bank statements as a way of evidencing you are in receipt of your pension

One of the first things you can do to find out how much money you may be able to borrow is to take advantage of one of the many equity release calculators that can be found online. Furthermore, talking to your lender will give you the opportunity to find out whether this is the correct type of financial product for you.

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Why Might You Take Out A Retirement Mortgage?

There are many reasons that people opt to take out a retirement, or lifetime mortgage.

Your financial situation may mean that this type of loan would be beneficial but some of the most common reasons for taking out a retirement mortgage are as follows:

• To fund home improvements
• To provide financial assistance to your children or other family members
• To give yourself greater financial freedom or supplement your pension
• To pay off the balance of your mortgage
• To clear other debts
• If you wish to move house
• To fund larger purchases such as a car, a dream holiday etc

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Are There Different Types Of Lifetime Mortgages?

When it comes to choosing a lifetime mortgage, your needs and financial situation will determine the type of mortgage you go for.

In the main, there are four different types of retirement mortgage and it is important to fully understand how each of these work – this will help you in making the right decision for you.

1. Lump-Sum Retirement Mortgage

This is the most common and basic type of lifetime mortgage and the one that many people find to be the most beneficial. These loans usually come with a fixed interest rate which means that you will never have to worry about an unexpected rise.

However, the full sum of the interest becomes payable in the event of your death or if you move into full-time residential care. Over the course of the loan, interest rates are ‘rolled-up’ and are added to the sum of the loan each year.

The sale of your property will be used to repay the entire sum of the loan at the end of the term. The remainder will be handed back to your estate.

2. Drawdown

In some cases, if you do not require a large upfront sum, you might opt for a drawdown mortgage which will offer you a smaller amount up front and the rest of the loan can be taken further down the line.

This is a good option if you feel that you may need to borrow more at a later date and since you will only be charged interest on the money that has already been drawn, you won’t pay over the odds. Many people prefer this option as it can work out much cheaper.

3. Interest Repayment

Many lenders who offer lifetime mortgages will give borrowers the chance to pay off the interest during the term of the loan. You may choose to pay all of the interest off or just part of it, but this leaves you will a lesser sum at the end of the loan term.

4. Enhanced Lifetime Mortgage

If you have a lower than average life expectancy, there are some companies who offer a lifetime mortgage to suit this. Some of the main lenders who do this are More2Life, Aviva and Just Retirement.

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What Are The Advantages Of A Lifetime Mortgage?

Taking out a lifetime, or retirement mortgage is certainly an advantageous move, provided that you have considered the severity of the consequences should you fail to make the repayments and that you meet the eligibility criteria:

• Lifetime mortgages are flexible products that give you a variety of options. For example, you might decide to take a large upfront sum or spread out the loans over a longer term – you have the freedom to meet your requirements
• When you take out a retirement mortgage, your home remains your own. There are some financial products that take away ownership of your property and this is, of course, not beneficial. However, your home continues to belong to you and it will only be sold in the event of your passing or when you move into full-time care
• You have greater control over your debt when taking out a lifetime mortgage and this is thanks to the fact that you will never be expected to pay back more than the value of your home. Additionally, if you wish to move house, you can simply transfer the debt to another eligible property, so you aren’t tied to remaining in the same house for the rest of your life
• Many people find that money becomes a little tighter during retirement, especially if they are relying on a smaller pension. A lifetime mortgage means that you will have much greater financial freedom and will be able to do many of the things that you enjoy and fund your retirement in a much more easy manner
• If the lender is approved by the Equity Release Council, you will not have to transfer any of your debt to your estate – this, coupled with not having to pay more than the value of your property means that finding an approved lender is crucial

Please call our 24-Hour Helpline: 0330 058 1579

Contact Us For More Information

If you are considering taking out a lifetime mortgage or have further questions on your eligibility, why not contact us for more information.

We have an experienced team of highly knowledgeable staff who will be more than happy to talk through your options and give you further information on the selection of retirement mortgage options available to you.