An increasing number of people have been using their home as a resource to help fund their retirement, which has become a mainstream option. This is because a lifetime mortgage can really help elderly homeowners to get the most of their retirement years, in the shape of helping family or home improvement or enjoying a desired lifestyle. But how is this so? This article lets you discover how a lifetime mortgage helps fund your retirement.
Understanding a Lifetime Mortgage
A lifetime mortgage is a kind of equity release that secures a loan with your home as collateral. It lets homeowners release some of the “tax-free cash” tied up in their home, without a need to move. They have the option to either take maximum sum of money available to them or take smaller amounts as per their needs.
In simple words, homeowners don’t have to pay monthly payments, rather, the interest is accrued on the amount they owe each month. It implies that interest is charged on that loan, in addition to already-added interest. The amount the homeowners owe goes up faster with time, reducing the amount of equity left in their home. If you are close to retirement and considering using your investments and savings for a lifetime mortgage, you may find cheaper ways to borrow money.
Is there any other kind of equity release? This is the question often asked in case of a lifetime mortgage. The answer is, apart from lifetime mortgages, there is another kind of equity release, termed as “home reversion plan”. Though considered as an ordinary equity release type, it accounts for even less than 1 percent of the market. This kind lets you sell some or all of your property in exchange for a tax-free lump sum cash and a lifetime lease without any obligation related to monthly repayments. You can live in the home without paying rent, for a period as you decide. In case, if 100% of the home value has not been exchanged, you have to share any increase in the home value, with the home reversion plan company.
How Much Can You Borrow?
The amount that can be borrowed is based on some factors including your age, the property value and in some cases, your health. For instance, the calculators on Aviva’s website, a British multi-national insurance, savings and investments company, shows that a person aged 71, having £300,000 house, can borrow £120,000 maximum from Just Retirement, or £111,000 from Aviva. If you are suffering from any medical condition, you might borrow a bigger proportion of your property’s value or get a cheaper interest rate through an “Enhanced plan”. Some lifetime mortgage providers, such as Aviva, let borrowers to protect a percentage of their property’s value as an inheritance.
However, taking an “inheritance guarantee” can cut the amount one can borrow, and thus, may affect the interest as well. As far as the age is concerned, the equity release customers are getting older, with average age rose to 71, David Ellison at independent specialist firm Lending Expert says.
The Benefits of Lifetime Mortgages
Some of the great benefits of lifetime mortgages are:
- Homeowners are not under an obligation to pay monthly payments
- The lifetime mortgage is typically paid from the sale of the property if the last surviving borrower expires or goes under long-term care.
- Homeowners can take the tax-free cash lump sum or smaller amounts as per their needs.
How does a lifetime Mortgage Fund Your Retirement?
- A lifetime mortgage can supplement a pension income and raise a general lifestyle.
- Day to day, you experience a better quality of your retirement. While living in your home, it is a great feeling to know that your bills can be paid.
- You can avoid the burden of monthly repayments and clear off your outstanding debts, though it is recommended to think carefully regarding securing a debt against your property.
- Many homeowners use their lifetime mortgage for their home improvement or renovation, to make it more manageable to stay in longer.
- The holiday of a lifetime, with family or friends.
- You may also give your family members their inheritance before-hand, which can help their first-home deposit, for instance.
The Bottom Line
Though a lifetime mortgage brings many benefits to the people in their retirement, yet it is a big decision with many factors to understand earlier. It is better to get a lifetime mortgage through a professional and reliable lifetime mortgage adviser. If you already have your financial adviser, discuss the benefits and risks for your case to make an informed decision and reap the benefits of lifetime mortgage to the fullest.