A Lifetime Mortgage May Be Used To Finance A Project Or To Supplement Pension.

In the UK, a lifetime mortgage is a type of equity release loan which is aimed at unlocking cash from homeowners over the age of 55. This form of financing is expensive and complicating and should only be used as a last resort.

There are two types of lifetime mortgages:

Standard lifetime mortgages
drawdown lifetime mortgages

In a standard lifetime mortgage you get a tax-free cash lump sum which may be used to pay off accumulated debts or for funding your grandchild's college fees. It may also be used to fund your dream holiday, buy a new car or for a home improvement project.

The advantages of a lifetime mortgage are:

interest rate is fixed at the beginning so you need not worry when interest rates move up after you have signed the equity release agreement.
there is no monthly repayment to be made in your lifetime. Repayment of the equity release mortgage and the accrued interests will accumulate and will be deducted from the sale proceeds of the property when you die or when you move into long-term care.
after repayment of the equity release mortgage and accrued interests, your estate gets the balance of the proceeds from the sale of your property.

The disadvantages of a lifetime mortgage are:

as interest is fixed at the beginning, you will continue to pay the fixed rate even if they should fall considerably later on.
if you decide to repay the equity release mortgage early, you may incur an early repayment charge

Drawdown Lifetime Mortgages

A drawdown mortgage allows you to take the equity release mortgage in stages when you need access to the money, rather than taking a lump sum payment upfront. Hence, a drawdown mortgage is cheaper than a standard lifetime mortgage.

By releasing cash in stages, it can be used to supplement your pension and provide a guaranteed income for life.

The advantages of a drawdown mortgage are:

if you don't need a huge sum of money all at once, you can take the loan in instalments, as and when you need them.
the overall cost of the loan is lower because you only pay interest on the amount of your drawdown. Consequently, you can leave a larger inheritance for your children or beneficiaries.

The disadvantage of a drawdown lifetime mortgage is that you may be required to withdraw a minimum amount, which may be higher than what you need the money for.

As there is more competition in the market for lifetime mortgages, interest rates are lower than home reversion plans.

However, you may find other alternatives to equity release loans more suitable for you, such as downsizing and moving to a smaller and cheaper property.

If, after you have involved your family, you decide that an equity release mortgage is the only option available to you, then you should seek the advice of an independent equity release specialist who will guide you through the application process.

By: Chow Siew

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Chow Siew is a retired accountant. He is the webmaster of retirement-lounge.com. This site brings news, pension information, money matters and activities for the online retirement community. This is also where seniors socialize and interact with each other.