Have you ever dreamt of a fresh start, a change of scenery, or perhaps a home better suited to your needs as you get older?
Securing a traditional mortgage later in life can present challenges. Lenders have stricter criteria for older borrowers, with age limits and income requirements that can be difficult to meet.
A lot of people question if you can buy a house with a lifetime mortgage and they do offer a potential solution tailored specifically for homeowners aged 55 and over.
This type of equity release plan could be the key to unlocking the funds you need to purchase your ideal property in retirement. Let’s explore how lifetime mortgages work and how they can be used to buy a house.
Please Note: The content on this page is designed to be a helpful starting point for understanding equity release. It explores the concept, different plan types, and the general process involved. However, equity release is a complex financial decision with significant implications for your long-term financial security. To determine if equity release is the right option for you, it’s essential to consult with a qualified financial adviser who specialises in equity release products.
What is a Lifetime Mortgage?
A lifetime mortgage as a special kind of mortgage designed only for homeowners who are 55 or older.
It’s secured against your property, and the amount you can borrow depends on your age and the value of your new property.
The key difference between a lifetime mortgage and a regular mortgage is that you typically don’t have to make monthly repayments.
This can be a great benefit for people on fixed incomes, as it frees up money for other expenses or simply allows you to enjoy a more comfortable retirement.
Importantly, even with a lifetime mortgage, you remain the full owner of your home.
You have the right to live there as long as you like, whether that’s for the rest of your life or until you decide to move into long-term care.
Can you use equity release to buy a house?
Yes, you can.
Most people think of equity release as a way of releasing cash from a property, without moving. This is possibly the most common scenario.
But with a lifetime mortgage you could choose to buy a house and move somewhere else instead.
Who Can Benefit from Lifetime Mortgages?
Lifetime mortgages are tailored for those aged 55 and over, offering a unique way to tap into property wealth in later life. Whether you’re currently a homeowner or not, this option could be the key to your next property purchase.
Here’s who could benefit:
Homeowners: If you have a mortgage and want to downsize, relocate, or simply release some equity to enhance your retirement, a lifetime mortgage could be a good fit.
Non-Homeowners: Surprisingly, you don’t have to already own a property to use a lifetime mortgage. It can be used as a way to finally step onto the property ladder later in life.
Those Facing Life Changes: Whether it’s a divorce or separation, or simply wanting a fresh start, a lifetime mortgage can help make the transition to a new home smoother.
Anyone Over 55: Don’t feel limited by age! Even if you’re 55 or older and haven’t bought a home yet, a lifetime mortgage can help you secure your first property.
Those with Equity or Savings: The amount you can borrow depends on your age, the value of your current home (if you’re a homeowner), and sometimes your health.
How much can you borrow?
The amount you are able to borrow will depend on your age. For joint plans the youngest persons age will be used.
As a quick example:
A 55 year old wanting to buy a house for £300,000 would be able to borrow 24%, which is a mortgage of £72,000. The remaining £228,000 would need to come from your savings.
A 75 year old wanting to buy the same house could borrow 47.5%, which is a mortgage of £142,500 and a cash deposit of £157,500.
Not a homeowner?
Lifetime mortgages can still help you, even though you may not own your home at the moment.
This includes first time buyers!
The lifetime mortgage will be used to pay for some of your new home, with the rest coming from your savings and investments.
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Choosing the Right Property
Finding the right property is an exciting part of the journey, but it’s important to balance your desires with practical considerations and the lender’s requirements.
Because it will be used to eventually repay the mortgage, equity release lenders need to be confident that the property you choose will be saleable and retain its value over time.
This means they have specific criteria when it comes to the type and condition of the property:
Standard Construction
Most lenders prefer properties built with standard materials like brick or block and have a tiled roof.
If your dream home is timber-framed or has a thatched roof, it will be more difficult to get approved.
Condition
As with all mortgages, the property should be in good, habitable condition.
Any significant repairs needed could affect the amount you can borrow or even lead to a declined application.
Leasehold Properties
If the property is leasehold (meaning you don’t own the land it’s on), the lender will want to see a long lease remaining – usually at least 70 years.
This ensures the property will retain its value and be easier to sell in the future.
Retirement Homes
Retirement homes, or warden assisted properties, often have age restrictions or offer care services and are not normally acceptable.
This is because they might be harder to sell on the open market and aren’t accessible to all buyers.
Types of Lifetime Mortgage
There are several types of lifetime mortgages, each with different features and options. Your adviser will explain them and identify the one’s which suit you the best.
Lump Sum Lifetime Mortgage
This is the most straightforward type of lifetime mortgage.
You receive the entire amount of borrowed equity as a single, tax-free payment. This is an excellent option if you have a large, immediate expense, such as clearing an existing mortgage or making significant home improvements (or buying a house).
However, it’s important to remember that interest will start accruing on the entire lump sum immediately.
Drawdown Lifetime Mortgage
This plan offers greater flexibility and is currently the most popular option.
You initially receive a smaller lump sum, and the remaining amount you’re eligible to borrow is held in a “cash reserve.” You can then make additional withdrawals from this reserve as and when you need them, up to the agreed limit.
One of the major benefits is that you only pay interest on the money you’ve actually drawn down, rather than the entire amount. This can make drawdown mortgages a more cost-effective option if you don’t need all the funds upfront.
Optional Payments
Lifetime mortgages approved by the Equity Release Council allow you to make voluntary payments towards the interest on your loan.
These payments aren’t mandatory but can help manage the overall cost and the impact of rolled-up interest over time. You might have the flexibility to choose between regular monthly payments or one-off lump sum payments whenever you have spare cash.
There will be limits on how much you can pay back each year without incurring early repayment charges. A 10% per annum limit is common but it’s important to clarify these terms with your adviser if you feel this option is going to be important.
Interest Rates
The interest rate will have a significant impact on the overall cost of the loan. Lifetime mortgages offer interest rates that are fixed for the life of the mortgage, providing you with peace of mind and predictability.
Impact on inheritance
One of the most important things to understand about lifetime mortgages is their impact on your estate and the inheritance you leave behind.
Since it’s a loan secured against your home, the amount you borrow, plus any accrued interest, is repaid from the sale proceeds of your home when you pass away or move into long-term care.
This means that the value of your estate will be reduced by the total amount owed to the lender.
No-Negative Equity Guarantee
The interest on lifetime mortgages compounds over time, meaning it’s added to the loan balance and also accrues interest. This can lead to the amount owed increasing significantly over the years, especially if you live a long life after taking out the mortgage.
All Equity Release Council approved plans must have a “no negative equity guarantee”.
This means that when your property is sold, and agents’ and solicitors’ fees have been paid, even if the amount left is not enough to repay the outstanding loan, your family won’t be liable to pay any more.
Alternatives
It maybe that an alternative type of mortgage could be more suitable for you. Your equity release adviser will be able to discuss your options and help you to decide.
RIO Mortgage
With Retirement Interest-Only Mortgages (RIO) you make monthly payments to cover the interest, and the loan is repaid when you die or move into long-term care.
This could be a good option if you have sufficient income to cover the interest payments.
Downsizing
Selling your current home and buying a smaller, more affordable property could free up enough cash to eliminate the need for a lifetime mortgage.
Additionally, a smaller home usually comes with lower bills and less upkeep, making day-to-day living more affordable.
Getting the right advice
All equity release plans are regulated by the Financial Conduct Authority (FCA).
The FCA require all borrowers to seek professional advice before applying for any type of equity release plan.
Not every adviser is allowed to do this, they need to be a qualified equity release adviser.
Your adviser will be able to fully explain your options, the costs involved and the advantages and disadvantages. Once they fully understand your situation they can begin to research your options and select a suitable equity release solution.
Let Respect Mortgages help you take the next step.
We can match you to an award winning equity release specialist, with over 25 years experience helping people just like you. Importantly they’re also members of the Equity Release Council.
Please call us on 0330 030 5050 for more details.
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