Your retirement years should be a time to settle down and really enjoy life. This could encompass going on dream holidays, achieving tasks around the home and garden that improve your lifestyle, devoting more time to hobbies and interests, and spending time with family and friends.
Of course, you'll still need money to help deliver most of this. Historically, your retirement years would probably have been funded by your pension (both personal and state), other applicable state benefits, along with any investments or savings you may have.
However, life is often never that simple and the economic climate over recent years may have put a dent in some of those expectations. On top of this, the impact of an ageing population is likely to mean that state support can only go so far.
Peace of mind
Of course, there are a number of areas that need to be considered to identify if it's right for you, and that's why you have to take professional advice.
And if it's a suitable option, then it may deliver funding to help tackle issues such as:
- Paying off the outstanding amount on an existing standard mortgage loan
- Money to assist with repairs and renovations to the home
- Meeting day-to-day living costs and expenses
- Providing the holiday of a lifetime
Access to funds
The upside though for many, across the last few decades, is how the value of your home may have increased. This has resulted in a sizeable number being relatively cash poor, but asset rich through property wealth.
If you need extra funds, and are happy to move, then you could downsize and raise the money this way. However, should you wish to remain in your current home, then an alternative exists - an Equity Release plan.
There are a number of different options to help meet varying needs, but basically you can raise funds (up to agreed limits), and not even have to pay off any capital or interest at any point during your lifetime, if that's the route which best suits you. The provider of the loan would reclaim the capital (and any accumulated interest) through the sale of the property, once the final plan holder dies or moves into long-term care.
Advantages and disadvantages of lifetime mortgages
- You continue to own your home
- If the value of your property increases, you continue to benefit from it
- You can choose between a tax-free lump-sum or a regular income
- Alternatively, with a drawdown product you can access the tax-free cash as and when you need it. This means that you're only charged interest on the actual amount you use (remember, you're charged interest on the loan amount and any interest gained during that period)
- You have the option to leave an inheritance (with an Inheritance Protection Guarantee)
- You don't have to make any regular repayments but if you wish, you can choose a plan that allows you to make regular or ad hoc repayments
- The lifetime mortgage is repaid at the end of the plan. This is usually when the last plan holder living in the property passes away or moves permanently into long-term care
- The amount you owe increases during your lifetime as interest accumulates and is added to the loan. This reduces the value of your estate and possibly erodes any inheritance you could leave behind
- Equity release could affect your entitlement to means-tested state benefits
- If you decide to repay early there may be a substantial early repayment charge
- Depending on property prices and how long you live, you could owe as much as 100% of your home's value to the lifetime mortgage provider
- The interest may be higher than the interest on a standard mortgage
- Charges for equity release advice, valuation fees and solicitors' fees may apply, as well as admin fees
- Younger borrowers can't borrow as much
You can move house after releasing equity, provided the new property meets your equity release provider's lending criteria.
Types of Lifetime Mortgage
There are several different types of lifetime mortgage. The best product for you will depend on your personal circumstances, which is why it’s so important to seek professional, personalised advice from an expert.
With all equity release mortgage products, you borrow money against the value of your home. What does differ between plan types is how you repay the equity release loan. It’s important to weigh up the pros and cons of each type before you go ahead.
- Roll-up - With this type of lifetime mortgage, you will not be required to pay anything back until the end of the term, which will be either when you die or go into long-term care. This is a clear advantage if you do not have a regular income. However, the interest can be eye-wateringly expensive, which could be a problem if you plan on leaving a legacy for your loved ones. The good news is that some products come with an option called an Inheritance Protection Guarantee, which means you can ring-fence some of the value in your home for your loved ones
- Interest-only - If you do have a regular income, then an interest-only lifetime mortgage might be a good option for you to consider. You will be required to pay the interest portion of your loan each month, thus ensuring that you or your estate is only required to pay back the original amount you borrowed (so long as you keep up with the repayments). The disadvantage of this type of lifetime mortgage is that you must have a regular income, and you will need to be sure that this will continue until you die or go into long-term care. If you needed to, you can usually convert to a roll up of the interest (see above)
- Drawdown - This type of lifetime mortgage might be considered a best-of-both-worlds option. With a drawdown lifetime mortgage, a lump sum will be released into a cash reserve. You can take an initial lump sum, and then withdraw smaller amounts from this reserve (subject to minimum amounts – usually £2000). The advantage of this approach is that you will only pay interest on the amount you withdraw from the cash reserve. This means the interest repayment at the end of the term could potentially be lower than if you took out a roll-up lifetime mortgage
Lifetime Mortgage Rates
Another important consideration when looking to release equity from your home will be the lifetime mortgage interest rate and whether to opt for a fixed rate lifetime mortgage or a variable rate lifetime mortgage. A fixed rate lifetime mortgage may suit someone looking for the peace of mind of knowing exactly what the product will cost them.
A variable rate lifetime mortgage may initially have a lower interest rate than a fixed rate lifetime mortgage, but you will need to be comfortable with the possibility that it could increase in the future. As with regular mortgages, variable rates can be impacted by wider economic events, so it would be good to look at the economic and political climate before deciding on a variable lifetime mortgage.
Equity release interest rates are generally higher than conventional mortgage interest rates and it is important to be aware of how quickly interest can roll-up on an equity release loan. If you are worried about the build-up of lifetime mortgage rates over time, especially if you want to leave an inheritance, don’t hesitate to ask an independent adviser to explain to you exactly what you’re getting yourself into. It’s better to ask lots of questions and have lifetime mortgages explained thoroughly to you than it is to sign onto an equity release mortgage without knowing all the facts, as it’s a decision that can have a huge impact on the rest of your life as well as your inheritance.
Lifetime Mortgage Provider Charges and Fees
Aside from the interest rate, it is important to consider the charges and fees that lifetime mortgage providers may require. A provider that offers low lifetime mortgage rates but with a high fee and unfavourable charges may turn out to be a worse choice compared with a provider that offers a somewhat higher equity release interest rate, but without fees or overly complicated charges.
One charge to pay particular attention to is the Early Repayment Charge (ERC). If you want at least the option of being able to repay your lifetime loan early, you will need to keep an eye on the ERCs that providers charge. All of these factors are considered and will be discussed with you before making any decision.
To understand the features and risks of a lifetime mortgage, please ask for a personalised illustration.