A lifetime mortgage is one form of equity release and it could give you a pot of tax-free cash without any need to repay anything until you die or move into long-term care. But is it right for you?
According to the Office for National Statistics (ONS), the average cost of a house in 1980 was £24,000. In February this year, the average was £277,000. Yes, that includes London and the South East, but even the North West average is now over £200,000.
If you bought your home in the early 80s and 40-ish years later have never moved, your home’s value has therefore increased by around £176,000. Even if you bought your current home at the turn of the millennium, it’s roughly doubled in value. Which sounds like a good reason to celebrate, but for one small problem – all that money is tied up in your house.
That may not be a problem for you. Then again, it might be.
Why might you want to release the money tied up in your home?
Perhaps you want to enjoy your retirement, and the money you free up could enable you to live a more exciting life.
Perhaps you don’t want your children to have to wait until you’re gone to benefit from the increase in your home’s value. Giving them money now, perhaps when they’re trying to get on the housing ladder, may be of much greater benefit than waiting to inherit when they’re in late middle age.
Perhaps you want to make some significant home improvements to see you through your retirement and need the capital to do it.
Perhaps you need a medical procedure (a hip or knee replacement, for example) and the money that’s locked up in your home could help you access private treatment.
Still paying your mortgage? Releasing the equity in your home could be one way of paying it off now.
A lifetime mortgage is one way of releasing the value of your home and it could be an effective way of achieving any of the above. Like any financial arrangement, though, it’s not right for everyone and you need to be aware of the risks.
Lifetime mortgages explained
A lifetime mortgage effectively gives you a tax-free lump sum (or several lump sums) to use as you wish. You stay in your home for as long as you like and, unless you decide otherwise, there’s nothing to repay unless you die or your home is sold to pay for your care.
Interest is charged on any money you receive, and here’s where it becomes important to choose the right product for you.
Some lifetime mortgages allow you to pay back interest, part of the mortgage, or both. Some don’t.
Some guarantee that the interest on the amount you receive will never be greater than the value of your home when it’s sold. Some don’t.
Although virtually every lifetime mortgage will allow you to move home, some providers place greater restrictions on any future move.
Some lifetime mortgages enable you to protect a portion of the value of your home so that your loved ones still get to inherit something. Some don’t.
What are the risks of a lifetime mortgage?
As you might expect, releasing equity means there’s less for your loved ones to inherit, and gifting large sums to them now could expose them to Inheritance Tax. If you intend to pay off your mortgage, you may also face an early repayment charge for doing so. If you receive means-tested benefits, the cash injection of a lifetime mortgage could put these at risk.
Other risks can be mitigated by choosing the right product. You don’t want to be locked into a lifetime mortgage that leaves you in negative equity, for example.
Finding the right lifetime mortgage
If a lifetime mortgage sounds like it could be an option worth investigating, it really is important to talk to an expert to find out if it’s right for you, to find the right product and to explore what your next steps should be. Sharon Duckworth will advise you.