Your retirement phase may last over half as long as your entire career. So, you should plan wisely for your later life and meticulously review your financial choices. Gone are the days when only your pension was supposed to see you through the retirement years. Now you can unlock the value of your home and turn it into a cash lump sum. This is called equity release.
If you are 55 years or older, equity release is the best way to derive tax-free cash from your property value and financially secure your retirement phase. It is of two types:
- Home reversion: The plan allows you to sell a percentage of your property to the lender against a regular income, a cash sum or a combination of both. You may continue living in the home as a tenant.
- Lifetime mortgage: Equity release lifetime mortgage is a type of loan you can secure against the value of your home. The key advantages are that you retain ownership of the property, can live there indefinitely, and do not need monthly repayments.
In this article, we will learn more about what a lifetime mortgage is, its pros & cons and how it works.
What is a Lifetime Mortgage?
If you are planning for your retirement, lifetime mortgage equity release can be your best bet. It is a type of equity release plan that enables you to derive equity against your home and take out a mortgage for life. Here, you have two borrowing options:
- An initial loan amount and then multiple smaller amounts drawn over time
- A lump sum
How Does Lifetime Mortgages Work?
When you pay off a mortgage on your property, you gain 100% equity in it. To put it simply, you own the property entirely. Equity release lifetime mortgage enables you to make the most of your home’s value and take some cash out of it once you retire. The loan is paid back only when the property is sold if you move into long-term care or after your death.
There are no monthly instalments but compound interest accrues on your loan amount. This either gets added to the total mortgage amount or you can repay the same. In case of your death or if you go into long-term care, the property is sold and the sale amount is used to repay the mortgage.
Using a lifetime mortgage, you can release anything between £10,000 and £100,000, depending on two factors:
- The age of the person who takes out the equity release mortgage
- The value of your property
Key Advantages of Equity Release Lifetime Mortgages
You might be wondering if a lifetime mortgage is a good idea. Let’s check out its key benefits:
- In your retirement, taking out cash to meet contingencies can be challenging as you mostly depend on your fixed-amount pension. Equity release enables you to take out cash to spend now instead of having it locked away in your property. The money could be used to:
- Pay off your existing mortgage on another property
- Gift money to family or friends
- Pay for your post-retirement vacation
- Pay for a home extension or adding a new bathroom or kitchen
- Home renovations
- Pay for your grandchildren’s tuition fees, wedding, etc.
- Another advantage is that the ownership of the property lies with you. Regardless of that you are getting a mortgage against your home, everything still belongs to you. You continue living in the property as long as you wish.
- There are no monthly instalments required – you only pay interest accrued on money that you take out as a mortgage.
- You may receive a lump sum tax-free amount ranging between 31% and 63% of the property value based on your age.
- Some mortgage companies may also allow you to repay up to 10% of the loan every year with zero penalties. This will help reduce the total amount your property owes.
Are there Any Risks of Lifetime Mortgages?
Considering an equity release lifetime mortgage is an important decision. You should keep in mind that unlocking cash from your property may reduce its value over time. So, you won’t get as much of the sale value as you would expect.
On the other hand, compounded interests accrue on your mortgage amount every year. It means you pay interest on the loan amount as well as on the interest that is added. Hence, the total amount you owe may increase quickly. It is important to work with an experienced financial advisor to know if a lifetime mortgage is the right option for you.
Lifetime Mortgage vs. Equity Release – What’s the Difference?
Lifetime mortgages are a type of equity release. You have two primary types of equity release plan – home reversion and lifetime mortgage.
The benefits of equity release mortgages are considerable. It ensures financial security to people aged 55 or over, allowing them to take out a lifetime mortgage against the value of their homes. However, work with a financial advisor to know if you are a good candidate for an equity release lifetime mortgage.
Attention: Late repayments can cause you serious money problems. For help go to moneyhelper.org.uk