What is a lifetime mortgage? In its simplest form, a lifetime mortgage lets you release some of your equity from your home, without the requirement to constantly move. They work a little differently than other traditional mortgages; the amount that you can borrow varies depending on how much your home is worth and how much equity you have in it, instead of how much you are able to pay every month. This may sound confusing, but it really just means that you have an option for the remaining balance on your loan, and by paying off the mortgage earlier, you free up the money to use somewhere else. However, you shouldn’t jump into borrowing the money too soon, because this is a decision that you will have to live with for the rest of your life.
When you take out a traditional loan, you usually pay back a lump sum that is almost always tax-free. You may also be asked to make repayments for a certain number of years, and then have the remaining balance due at the end of that term. However, if you take out lifetime mortgages, you will have the money that you borrowed and will have no need to ever pay it back. However, the money you have borrowed will still be tied up in the property that you got the loan secured on. This means that although you may be free to spend the money as you wish, there are many restrictions on what you can do with it.
Although you don’t have to stay in your home for the full term of the loan, lenders require that you maintain an income level that meets the terms of the agreement, for a minimum of five years. If you were to start paying the money back immediately, the lender would be required to repossess your home in order to recover their investment. Lenders also check that you have a long-term income, and in most cases, this means that you will have a good credit rating and have been in a similar situation for at least two to three years. Because interest rates on these loans are usually high at the beginning, lenders want to ensure that they are able to recoup their initial investment, and will usually charge a higher rate of interest for those that have poor credit ratings or have a longer than average length of time to service the loan.
With a lifetime mortgage, you don’t need to keep up with monthly repayments, as the repayments are taken out of the equity of the property you have taken out. Instead, you pay into the capital each month until the total cost of the mortgage has been repaid. You will then own the home completely and will be able to sell it if you want to. Although you will always have ownership of the house, lenders will only release a specified amount of equity, known as your’Maiden Loan’, each year. This is typically around 70% of the total value of the property. This means that you will not lose any of the money you pay in the form of monthly repayments.
How does a lifetime mortgage work? Once you have paid the initial cost of borrowing the total sum, and once the balance of the loan is repaid, you will become the owner of the home. You can then increase the amount owed on the property, or borrow more from the lender, according to your circumstances and preferences. The interest rates will normally be slightly lower than a standard loan because you are considered to be more secure than a customer that has just started to carry a mortgage.
A lot depends upon which type of loan you take out, and also how you plan to make the repayments. A variable life provider will give you greater flexibility, giving you a larger leeway to decide when to repay the loan and what type of interest rate to set. If you take out a permanent insurance policy in your retirement, a permanent insurance company can also help you find the best deal for lifetime mortgage insurance. It is important to look carefully at all the different types of options available to you as you look into how a lifetime mortgage might benefit you in your retirement. Knowing how to make this type of investment work for you can be the key to living comfortably in your golden years.