If you want to increase the amount of money you have available to live on during retirement, or need money for a big-ticket purchase, there are a number of options open to you.
Working past retirement age, investing your pension pot in riskier funds, selling your assets – these are all fine options, but for homeowners who are in or approaching their retirement, there's another possibility available: a lifetime mortgage.
What are they?
A form of equity release, lifetime mortgages allow homeowners to take a loan out on their home that is only repaid when they pass away or move to a care home although interest payments can be made to reduce any debt. Importantly, during the mortgage you still own the property, and there is no threat of repossession (as long as the terms and conditions of the mortgage are met).
The amount of money you can receive is dependent on a number of factors, including your age(s) and how much your property is worth. Some lifetime mortgage providers also take your health and lifestyle into consideration. You receive the money as a tax-free lump sum.
You can take a lifetime mortgage out on a percentage of your property, and the maximum you can take is usually up to 50% of your home’s value. If you choose to, you can fence-off some of its worth to ensure your family is provided with an inheritance when you pass away or enter long-term care.
When this happens, your family will be responsible for clearing the mortgage, which is usually done by selling the property. The amount remaining once the loan has been cleared belongs to your beneficiaries. If your family chooses to, they can also pay off the mortgage through other means, without having to sell the property.
The different varieties available
If you're thinking of taking out a lifetime mortgage, there are three varieties to choose from.
- Interest-paying mortgages
This is when you receive a cash lump sum and make payments to the lender on a monthly basis in order to stop, or reduce, the impacts of interest roll-up. You can choose how much interest you want to pay each month, and how long you’d like to make the payments for. Any interest which isn’t paid is added to the loan.
- Flexible payment mortgages
This type of lifetime mortgage gives you a cash lump sum, but you can choose if you want to make any payments each year. There is a limit on how much can be paid back without incurring an early repayment charge, but you have the flexibility to pay all of the interest and some of the capital.
- Interest roll-up mortgages
With this type of lifetime mortgage, you receive the lump sum but don't pay any monthly payments, with the interest being added to the loan over time, increasing the amount that is paid back when your house is sold.
Other things you should consider
Whichever type of mortgage you choose, there are other things to think about. The amount you release could affect any benefits you receive, such as pension credit and council tax benefit. You may also wish to consider the impact it may have on your family.
It is always worth considering the costs involved. You will have to keep your home in good condition and pay for buildings insurance. You may have to pay legal, valuation and completion fees; and you may have to pay your financial adviser a fee as well. Some lenders also charge penalties if the mortgage is paid back early.
If you already have a mortgage on your home, the money you receive from a lifetime mortgage will need to be used to pay back this mortgage before you can spend at will.
You should always enrol the services of a financial adviser if you're thinking of getting a lifetime mortgage as other options may be available to you. They will also be able to recommend which type of lifetime mortgage best suits your individual needs.
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