The Definition and Types of Lifetime Mortgages

There are many things that you can use a lifetime mortgage for but first you must know – what is a lifetime mortgage? A lifetime mortgage is a home equity loan whose main purpose is to unlock cash for homeowners to spend as they wish. It is usually provided to people over the age of 55. It is a complicated financing option and should be taken with proper advice of a qualified, independent financial expert.

The question “what is a lifetime mortgage” is common among people who are looking for a steady source of financing over long periods of time. There are several types of lifetime mortgages which people may choose from. The first type is known as a standard lifetime mortgage. In this type of mortgage you are given a tax-free amount of money in a lump sum. The uses of this money are completely up to you.

Some Common Uses of Lifetime Mortgage Borrowers:
1. Home improvements
2. Holidays
3. Monthly expenses
4. Medical expenses
5. Extra cash for enjoying retirement

The main features of this type of mortgage:
1. First, the interest rate is fixed right from the beginning. This is a good source of security for many borrowers as you will always know the future equity release balance.
2. Secondly, you don’t have to pay monthly payments for the rest of your life. When your property is finally sold off to repay the loan and the interest accrued, your estate will get the balance of the sale.
3. The loan has a disadvantage in that the market interest rate might later fall below the fixed rate of the loan.
4. The last feature is that you will attract a penalty if you repay the loan early.

Keep in mind, your home does not have to be sold if you can repay the loan with other funds. It all depends on how much the lifetime mortgage is for, the interest that accrues, and the housing value at the end of your life or when you move to a long term care facility. If you have other inheritance or your children want to save the home, they can find alternative solutions. The trouble with not selling the house is that providers want immediate repayment of the loan, where the provider will wait 12 months for the house to sell. Keeping the home is not ideal due to these drawbacks.

The second type of loan is the drawdown lifetime mortgage. When a person asks, “what is a lifetime mortgage?” the person usually has in mind a loan that will make sure that a person gets paid for the rest of his or her life. A drawdown lifetime mortgage loan has a more flexible approach than a standard lifetime loan. This type of loan gives a person access to the money when he or she needs it as it is held in a credit reserve account set up by the lender at inception. This is as opposed to a single lump sum payment from the basic lifetime mortgage scheme.

Main features of drawdown mortgage plans:
1. You only pay interest on what you access from the credit reserve account unlike paying interest on a lump sum you take out. It is also considerably cheaper because a person only pays interest on the amount of money that has been withdrawn.
2. You can take out smaller amounts thus using what you need, when you need it. This amount can be from as little as £2,000 a time and incurs no further administration charges upon withdrawal.

A drawdown lifetime mortgage is advantageous since it gives people a more accessible proposition by being able to decide when YOU want the money thus giving you complete control over your finances.

There is a third option in lifetime mortgages called enhanced or ill-health lifetime mortgage. It is for individuals with a low life expectancy than the average person as a result of illness. It involves a health questionnaire and at least one medical opinion to prove there is a significant health issue.

What is a lifetime mortgage? It is a financial option to make your retirement easier. It is not for everyone, but there are three choices that may fit you. Keep the drawbacks in mind and discuss this financial decision with your family and an adviser to determine if it is the right move for you. A financial adviser can help you look at the product objectively. Your family can remind you of the drawbacks and inheritance issues that may result.