Simply put, a lifetime mortgage is a debt that stays broadly the same throughout the lifetime of the debt, in that it is predictable and easy to plan. Despite this, many lifetime mortgages will allow for flexibility including overpayment's and early full repayments.

The term ‘lifetime mortgage’ is used to describe a wide range of alternative mortgage products that are now available on the market. In the current financial climate, borrowers are prepared to change lenders, on a regular basis, in order to obtain the best possible deals. In fact, as a result of the credit crunch, some borrowers are being forced to find alternative lenders because their existing lender will no longer provide the type of mortgage that they require. Lenders are constantly having to devise new and innovative ways to attract reliable borrowers, so offering lifetime mortgages is one of their options.

As a result, lenders are now trying to create a range of lifetime mortgages which keep borrowers with them at all times and are able to change with the different demands throughout life.

Life Time Mortgages Basics

As a general rule, lifetime mortgages, in the sense that they are mortgages that will last for a whole lifetime, used to be offered for twenty-five year periods. However, this is not the standard offering anymore and mortgages can be available for up to forty years. But do bear in mind that this length of mortgage will only be available to individuals who are likely to have at least forty years of working life left. Therefore, in reality, this length of mortgage will generally only be available to those under the age of thirty, or those with independent sources of income.

The term ‘lifetime mortgage’ is often used to describe a loan which is taken out on the property, while the borrower retains full ownership of the property; sometimes the loan is taken out in full as a lump sum and at other times it may be taken as a regular annuity income. The loan will last until the borrower dies or the property is sold. In the case of a lifetime mortgage taken out by two or more people, the loan remains until the last individual dies or again the property is sold.

Types of Life Time Mortgage

Broadly speaking, there are three types of lifetime mortgages: home income plans, draw down mortgages, and roll-up mortgages. Depending on the borrower’s individual circumstances and long-term plans, it should be clear which type of lifetime mortgage may be suitable. Advice should be taken from an independent source, before opting for any particular type of lifetime mortgage. Different providers will normally have different rules and criteria, so if you are unable to find the product you are looking for with one lender, try a different or even a specialist lender. The assistance of an all-market mortgage broker will be invaluable for this type of mortgage.

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Roll-Up Lifetime Mortgages

A roll-up lifetime mortgage is similar to a standard mortgage in that it is a loan secured on the property. With a roll-up mortgage the borrower makes no payments either in terms of interest or repayment and the amount of the loan simply rolls up and is settled at the point when the property is sold or the borrower dies.

One of the main issues to bear in mind with this type of mortgage is that the interest will accumulate. This means that every month more is added on to the total at an increasing rate to take account of the interest from the previous months being added to the total amount. Due to the nature of this type of loan, most lenders will only agree to lend a very small percentage of the property value. This is because the lender will want to be certain that when the point of sale is reached, the price obtained from the property will amply cover the total of the roll-up mortgage.

The best way to understand a roll-up mortgage is to consider an example. A mortgage of around £40,000 at an interest rate of approximately 6.9% will mean that the capital amount due ten years later will be nearly double and can increase three-fold within twenty years. Bear in mind that although these numbers may look quite weak, they do not take into account the rise in property prices. Based on the last twenty years, these figures would still result in more than £100,000 equity in the property.

Watch For negative Equity

Anyone considering a roll-up mortgage needs to think carefully about the potential of negative equity. If property prices do not rise at the same rate as the mortgage value increases when the property is sold, the borrower will be left with a negative balance, when it comes to settling the loan.

With a roll-up mortgage, the lender will keep a close eye on the value of the property and may have a set procedure for dealing with this eventuality. Make sure that you understand the procedures that your particular lender will invoke if this situation arises. Commonly, roll-up mortgage lenders will begin to charge monthly interest which will be payable to ensure that the size of the loan does not exceed the value of the property.

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Drawdown Mortgages

This type of lifetime mortgage works in a similar way to the roll-up mortgage. A maximum borrowing amount is agreed between the borrower and the lender. This amount is based on the property being used as security and, therefore, the maximum amount is normally no more than approximately 80% of the value of the property, at the time of valuation.

The borrower then has total flexibility surrounding how much of the maximum they borrow at any one time. It may be that they draw down a lump sum a year, or less frequently; alternatively, there may be a smaller monthly draw down. For example, if the maximum amount agreed is £100,000, it could be taken out as £50,000 immediately, with the remaining £50,000 being used as a regular smaller drawdown of say £5,000 a year for the next ten years.

Key Advantages of a Drawdown Mortgage

One of the key advantages of this type of mortgage is that you will only be paying interest on the amount that has been drawn down. This means that the borrower benefits from the security of knowing that the finances are available if they are required, but without having to pay the interest on the amount until it is actually utilised. Of course, this sort of facility comes at a price and as a general rule this type of mortgage will have higher interest rates and will have larger penalties for early withdrawal.

The entire amount borrowed, plus any interest will be payable at the end of term, when the property is sold or when the owner (or all co-owners) die.

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Home Income Plans

This type of lifetime mortgage is very similar to an equity release plan. In fact, they are so similar that many home income plans are expressed as being equity release schemes by lenders.

In brief, the property and the value within the property is utilised as security to borrow one large lump sum. This lump sum is then invested into an annuity plan which produces sufficient monthly income firstly to pay the interest on the loan and secondly to pay the borrower an income.

When the property is sold or the borrower dies, the capital amount of the loan is repaid from the proceeds of the property sale. One of the main criticisms levelled at this type of mortgage is that the amount of income generated from an annuity is normally incredibly low, particularly if spread over several decades. In order to gain a notable income, it would normally be necessary to be looking at an annuity of less than ten years, making this a more popular choice for older individuals over the age of approximately 80 years old, who are aiming to enhance their pension income.

Shared Appreciation Mortgage

A variant on this type of mortgage is the shared appreciation mortgage. This works in exactly the same way as the home income plan type of mortgage in that a lump sum is obtained and a regular monthly income obtained through the use of an annuity product. The difference is that the interest is either lower or non-existent as the lender will enjoy an agreed percentage of the rise in the equity value of the property.

Consider, for example, a £100,000 property and a shared appreciation mortgage of £25,000. Interest may be waived in exchange for a 50% interest in the equity rise. When the property is sold, ten years later, the property is worth £180,000. The initial £25,000 is repayable but the lender will also be entitled to £40,000 of the sale proceeds which is 50% of the rise of £80,000. The balancing £115,000 would then form part of the estate and the borrower would have enjoyed a regular monthly income from the mortgage for the ten-year period.

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