How to Release Equity from Your Property Using a Lifetime Mortgage
Releasing equity from your property through a lifetime mortgage can be an option for homeowners aged 55 and over. A lifetime mortgage allows you to unlock cash without needing to sell your home. In this article, we explore what a lifetime mortgage is, how it works, the application process, and important considerations to keep in mind.
Understanding Lifetime Mortgages
A lifetime mortgage is a type of equity release product that enables homeowners to borrow against the value of their home while retaining ownership. This financial arrangement allows you to release a lump sum or draw down amounts in the future as needed, with no requirement for monthly payments. Instead, the loan, plus any accumulated interest, is repaid from the sale of the property upon the homeowner’s death or when they move into long-term care.
From March 2024, all Equity Release Council endorsed plans allow payments to be made to the plan, which can limit the impact of interest ‘rolling up’ over time.
Key Features of a Lifetime Mortgage
No Monthly Payments
Optional monthly payments
You have the option to make payments on a flexible or monthly basis, subject to certain limits. Making payments, if you can afford to do so, means you will save your estate money and leave more for your beneficiaries or potential future care costs.
Retain Home Ownership
You remain the owner of your property and can continue to live there for as long as you wish, provided you keep to the terms and conditions of the plan.
Inheritance Protection
You remain the owner of your property and can continue to live there for as long as you wish, provided you keep to the terms and conditions of the plan.
Flexible Access to Funds
Some lifetime mortgages offer options to safeguard a percentage of your home’s value for your heirs, ensuring they can inherit something after your passing.
How Does a Lifetime Mortgage Work?
Step 1: Assessing Eligibility
To be eligible for a lifetime mortgage, you must be at least 55 years old, and the property should be valued at a minimum of £70,000. A qualified equity release adviser will assess your circumstances through a fact-find appointment to understand your specific needs and the options available to you. They will only recommend equity release if it’s the right solution and help you determine an appropriate loan amount.
Step 2: Understanding Your Options
Lifetime mortgages come in various forms, including:
🟦| Lump Sum Lifetime Mortgage: You receive a one-off lump sum payment, which you can use however you wish.
🟦| Drawdown Lifetime Mortgage: You receive an initial lump sum and drawdown additional funds in future years, which can help reduce the impact of interest rolling up from day one.
🟦| Enhanced Lifetime Mortgage: If you have specific health issues, you may qualify for a larger loan amount due to a potentially reduced life expectancy.
🟦| Interest Serviced Lifetime Mortgage: These are lump sum and drawdown lifetime mortgages where you commit to make monthly payments to limit the loan increasing over time.
Step 3: Seeking Advice
Before proceeding, it’s crucial to seek advice from a financial adviser who specialises in equity release. They can help you understand the implications of taking out a lifetime mortgage, including how it might affect your estate, inheritance, and eligibility for means-tested benefits.
Step 4: Application Process
You’ll complete an application form, with your adviser supporting you through the process. The lender will assess your application, including a check on any existing secured debts and your property’s value.
Step 5: Property Valuation
Once your application is submitted, a professional valuation of your property will be conducted by the lender, at no cost to you. The valuation is essential to determine how much equity you can release.
Step 6: Legal Requirements
Before completing the lifetime mortgage, you must receive independent legal advice. This is a legal requirement in the UK to ensure you fully understand the terms and implications of the mortgage. Your solicitor will review the contract and explain your rights and obligations.
Step 7: Completion and Accessing Funds
Once all conditions are met and legal advice is confirmed, the lifetime mortgage can be completed, and the lender will release the funds. The funds released can be used for various purposes, including home improvements, travel, or supplementing your retirement income. Specifically, what you want to use the funds for should be discussed and agreed upon with your equity release adviser.
Important Considerations
Impact on Inheritance
While a lifetime mortgage allows you to access cash tied up in your property, it’s essential to consider how this will affect your inheritance plans. Since the loan and any interest accrued will be repaid from the sale of your property, the amount left for your beneficiaries will be reduced. Some plans offer inheritance protection options to preserve a percentage of your home’s value, though this will come at an additional cost.
Effects on Benefits
Releasing equity through a lifetime mortgage may impact your eligibility for means-tested benefits. It is essential to consider this and speak to the benefits agency before entering into a lifetime mortgage.
Interest Rates and Fees
Lifetime mortgages typically come with fixed interest rates, but the rates can vary between lenders. Additionally, there will be the equity release adviser fee, a solicitor’s fee, and possibly lender arrangement fees.
No Negative Equity Guarantee
One significant advantage of lifetime mortgages that comply with Equity Release Council product standards is the ‘no negative equity guarantee.’ This ensures that you or your estate will never owe more than the property’s value when sold, provided it is sold for a fair market value and you have kept to the terms and conditions of the lifetime mortgage.
Equity Release Advice
A lifetime mortgage is a long-term commitment and can impact your future finances. Engaging with a qualified equity release adviser will help ensure that you choose a plan that aligns with your financial goals and circumstances. Equity release may involve a home reversion plan or a lifetime mortgage, which is secured against your property and will reduce the value of your estate.
Conclusion
Releasing equity from your property using a lifetime mortgage can be an effective way to enhance your financial flexibility during retirement. By understanding how lifetime mortgages work and seeking professional advice, you can make informed decisions that benefit your current situation and your future, while considering the implications for your beneficiaries.
