Lifetime Mortgage Myths
Lifetime Mortgage myths are prevalent as many people do not fully understand equity release and rely on opinions of friends and family. Equity release is not always easy to understand and many people quite rightly have questions and concerns about how it actually works. We help you sort fact from fiction so you know exactly what is involved with taking out a lifetime mortgage.
Property prices have of late been pretty resilient this means that for many older homeowners their home is their most significant financial asset. Lifetime mortgages give them a viable option to boost their income, to gift a living inheritance to loved ones or for their own use enjoying retirement to the full. A lifetime mortgage enables homeowners over 55 to release capital tied up in their property for any number of purposes.
In fact according to the Equity Release Council 16,527 customers took out a lifetime mortgage in the first quarter of 2021 raising total funds of £1.14bn. This option only seems to be growing in popularity and the increasing market means more product choice and options for homeowners seeking equity release.
So what is equity release?
Equity Release sometimes called Later Life Lending, comes in two main forms – lifetime mortgages and home reversion plans. At Integrity Mortgage Solutions we only advise on lifetime mortgages as with a lifetime mortgage you retain full home ownership.
With a lifetime mortgage, unlike other forms of equity release, you can release tax-free cash from your home whilst retaining full ownership of your home, and without having to commit to making monthly repayments.
Interest is charged on the amount released, with interest rates typically fixed for life. If you do not choose to make repayments over the course of the loan, then the amount borrowed, plus interest is simply repaid at the end of the term, often via the sale of the property.
What can the money be used for?
There are many different things you can choose to do with the money released with your Lifetime Mortgage.
4 in 10 equity release customers are using some or part of the funds they raise to clear an existing mortgage. In fact, according to the FCA’s Growth from Knowledge report 10% of people with an interest only mortgage have no repayment strategy for their mortgage and a fifth expect to have a shortfall when the balance is due to be repaid. This is resulting with people needing alternative mortgage options in order to keep living in their homes.
Another popular use is for managing your estate and inheritance tax planning. Many people are choosing to release equity from their homes to gift a ‘living inheritance’ to family at a time when they might need it most for buying their own homes or education.
Other people choose to raise funds in order to enjoy their retirement to the full, either raising money for special events or just to make life more comfortable.
There are lots of reasons you may wish to raise funds but here are some of the things our customers have done with theirs which you might consider:
Paying for health care, from one-off private medical bills to ongoing care in the home
‘Topping up’ your retirement income to make life more comfortable.
Managing your estate, wealth and inheritance tax planning.
‘Paying off an outstanding mortgage, including the shortfall on an interest-only mortgage.
Helping children and grandchildren with house deposits, student fees, weddings, and other major life events.
Renovating or refurnishing your home
Enjoying your retirement by buying a new car, taking a holiday or funding hobbies.
Adapting your home so you can live independently.
Pretty much anything you want to raise money for!
Let’s sort fact from fiction and debunk some of these lifetime mortgage myths.
You'll end up owing more than your house is worth
We only advise on lifetime mortgages approved by the Equity Release Council and this will ensure your plan will have a no-negative equity guarantee. This ensures that you will never owe more than the value of your home.
In a typical circumstance when your home is sold the funds will be used to repay your mortgage and the remaining money will be distributed in line with your wishes as stated in your will.
You won't leave any inheritance for your loved ones
Equity release is often used to gift your children or grandchildren an early ‘living’ inheritance’.
Many people want to support their families now rather than when they’ve passed away. It can be more beneficial to help family now when they might need help with purchase of a new home or to pay for education. This will of course reduce the equity left in your home and the value of any future inheritance.
If leaving an inheritance is important to you, you can protect a portion of the value of your home by choosing a product with an inheritance guarantee option.
Equity Release is expensive
When you take out a lifetime mortgage interest will be added to the total loan amount. You don’t have to pay off any of the interest or make payments during your lifetime. The loan is repaid when the last survivor dies or moves into long term care.
This results in compound interest, which means that interest is charged on the interest and the amount you owe will increase over time.
Some lifetime mortgage products allow you to pay some or all of the interest and we will look at all your options to make sure a lifetime mortgage is right for you.
It is important to consider whether there are alternative cheaper ways to borrow available to you.
You can't release equity if you already have a mortgage on your property
Having a mortgage doesn’t exclude you from taking out a lifetime mortgage and releasing equity from your home. In fact, using a lifetime mortgage to pay off an existing mortgage is one of the most common uses for a lifetime mortgage.
With a lifetime mortgage you receive money to use as you wish in exchange for a first charge on the property. This money can then be used to repay the existing mortgage leaving you with a lifetime term and no worries about making repayments.
You'll be forced to move out if your partner dies or goes into long term care
Having to move to a residential care home is one of the reasons an equity release scheme can be ended, with the loan repaid. However, if you have taken a lifetime mortgage as a couple the plan will continue as long as one of you still lives in your home – therefore if one of you move into care, the scheme can continue to run as long as the other stays in the property.
The same applies if one partner dies; as long as the surviving spouse remains in the home you are not obliged to repay the lifetime mortgage.
You won't be able to move home
You aren’t stuck with the property you took an equity release loan out on if you want to move home. Lifetime Mortgages offer a portability option so you can transfer the loan to a new property providing it fits the lender’s criteria.
Some plans let clients downsize to a smaller a property and repay all or part of the mortgage. Downsizing protection is a feature of some lifetime mortgages but there is usually a qualifying period of 5 years before it applies.
You won't own your home
This is a common misconception: that all equity release plans mean the lender owns your home, with you merely being granted the right to continue living there. Having a lifetime mortgage doesn’t mean you’re selling your home to the lender. Equity release is simply a method of borrowing against your property much like any other mortgage, it is a loan secured against your home that will be repaid when you die often from the sale of your home.
With a lifetime mortgage you’ll continue to own your home and can make home improvements as you see fit.
There is a less common method of equity release called home reversion, where you do sell all or part of your home to the provider but here at Integrity Mortgage Solutions we don’t advise on this type of lending.
You'll have to keep making repayments throughout retirement
Traditionally lifetime mortgages don’t require you to make any repayments at all – the interest is rolled up and will be repaid along with your initial capital when the property is eventually sold.
The exception to this is if you choose to make payments, but even then if you find you can’t manage the payments then the interest will just be added to the balance.
You have to take a lump sum payment
With some modern lifetime mortgage products you don’t have to take all your money in one go. Some providers offer the option to ‘draw down’ the funds in stages. The advantage of this is that the interest is only charge on the amount you’ve actually withdrawn and as you take smaller sums over a longer period of time the resulting interest charges will be lower.
Lifetime Mortgage Pros & Cons
It’s important to fully understand how equity release or a lifetime mortgage works, there are many advantages to this type of lending but there can be some drawbacks to. Our advisers will talk you through all the relevant pros and cons and will also consider any alternative solutions to your objectives.
Pros
When you release equity with a lifetime mortgage, you can take a lump sum in one go or a series of smaller lump sums when it suits you. You can also choose a monthly income if you prefer.
You can use the money you release for anything you want, including home improvements, helping your children get on the property ladder or to enjoy your retirement.
Unless you choose otherwise there is nothing to repay until you die or move permanently into long-term care.
If you prefer, there’s an option to repay some or all of the interest. You can also choose to repay part of the original loan
With equity release, you don’t need to downsize and can stay in your home until you die or move into long-term care.
So long as the new property is acceptable to the lenderyou can still move home.
If you choose to you can safe guard a portion of the value of the home to be guaranteed to pass on to your loved ones as inheritance.
Whatever happens you’ll never repay more than the value of your home when it is sold so you won’t leave a debt to your family. Talk to our adviser for full terms and conditions.
Cons
If you choose not to repay anything until you die or move permanently into long term care, the interest can rapidly build up over time. Discuss this with our adviser as we can look at alternative ways to borrow money.
Releasing equity with a lifetime mortgage is likely to reduce the amount of inheritance you leave. However, you can consider protecting a portion of your estate to ensure that you are able to leave an inheritance sum to your family
if you gift the money there could be a need to pay inheritance tax in the future subject to inheritance tax gifting rules.
If you choose to repay all or a significant part of the loan early, there may be an early repayment charge our adviser will discuss this with you in full.
If you’re receiving certain means tested benefits, taking a lifetime mortgage could impact your entitlement to these benefits.
Often the interest rates for a lifetime mortgage are a little higher than the rates charged for a traditional mortgage.
If you have no mortgage you can move to any type of property. With lifetime mortgage you can move but the new home has to fulfill their criteria.
If you currently have a mortgage that you are repaying with a lifetime mortgage then there may be early repayment charges on your current mortgage
Before you decide
Hopefully our article has helped you understand some of the lifetime mortgage myths you may have heard. Equity release won’t be right for everyone but for some people unlocking the money tied up in their property can make a real difference to their life.
Deciding to take out a lifetime mortgage is a big decision. It’s a good idea to speak to your family about your plans, it may affect them too, especially if it will impact their inheritance.
It is important to get good financial advice. We are qualified advisers for equity release and can help you understand which product is most suitable for your needs.
Is a Lifetime Mortgage right for you?
To be eligible to release equity from your home with a lifetime mortgage.
- You must be aged 55 or over
- You must own (or be buying) your own home
- Your home must be worth £70,000 or more
Call us now on 0116 239 5000
Our promise to you
We want to make sure you are comfortable and confident when making your decision. So we make these promises to you:-
- Provide no-obligation consultation to discuss your needs, priorities & preferences
- Work at your pace - you'll never be pushed or under any obligation to proceed.
- You will have one dedicated adviser who will work with you throughout your journey
- We will lay out plans clearly and talk to you about alternative options
- We will be honest and upfront about our fees.
- All our recommendations are pre-verified by our compliance team to ensure we are giving you good advice and the best possible outcome.
- We only charge a fee if you proceed with our recommendations
Ask us anything
If you need help with your next mortgage get in touch for a free initial consultation.
