Over the last few years we have seen a significant increase in demand for lifetime mortgages. This increase in demand has prompted more competition in the market and seen interest rates soften. As the UK population continues to age, demand for lifetime mortgages can only increase. So, what do you need to know about lifetime mortgages?
What is a lifetime mortgage?
In effect a lifetime mortgage is a type of remortgage for homeowners with a minimum age of 55. Unfortunately, due to changes in employment status and regular income, many older homeowners struggle to secure additional remortgage options. A lifetime mortgage offers the opportunity remortgage part of your property, with no regular repayments and an open ended mortgage term.
Will I need to pass a mortgage affordability test?
Interest charges on a lifetime mortgage are rolled up and paid off at the end of the mortgage term, together with the original mortgage capital. There is the opportunity to make ad hoc or regular interest/capital repayments over the years. However, the main attraction of lifetime mortgages for many people is the fact they do not involve regular repayments. As there are no regular repayments, there is no need for a mortgage affordability test.
What is the maximum LTV for a lifetime mortgage?
As a lifetime mortgage is open-ended, the available LTV tends to be less than that associated with traditional mortgages. You will find the range of LTV for a lifetime mortgage very rarely breaches 50%. This conservative approach takes into account rolled up interest (and interest on interest) together with head room in the event of significant property price falls over the years.
What is an open-ended mortgage term?
Traditional mortgages will have a fixed term, 10 years, 15 years, 20 years and beyond. The situation with a lifetime mortgages is different. The mortgage capital plus rolled up interest would be repaid once the property has been sold. Under the terms of a lifetime mortgage, the property would be sold on the death of the homeowner or move into full-time care. As a consequence, it is impossible to put an end date on the mortgage term, hence the reason why it is open-ended.
What happens to property proceeds when my home is sold?
Upon death, or move into full-time care, the property will be sold, mortgage capital and rolled up interest prepared. The balance will be returned to the living homeowner/executors of their estate. For many people this is a useful means of raising capital in later years, maybe to replace previous employment income.
What is an enhanced lifetime mortgage?
When researching lifetime mortgages you will probably come across the term “enhanced lifetime mortgage”. This is an option associated with homeowners who have underlying health conditions. As these health conditions will shorten their life expectancy, the open-ended term open of an enhanced lifetime mortgage is likely to be less than a normal lifetime mortgage. Therefore, this offers scope to increase the LTV because of the reduced risk.
There is no doubt that lifetime mortgages, as well as enhanced lifetime mortgages, will become more commonplace in the months and years ahead. At the moment, headline interest rates associated with lifetime mortgages tend to be higher than traditional mortgages. There is likely to be downward pressure on headline rates as we live longer and demand increases. It is important to take financial advice before committing yourself to any mortgage, especially a lifetime mortgage which has a number of unique characteristics.