Managing an active retirement can present significant problems for the many people who are blessed with good health but cursed by the effects of the poor performance of pension funds and low annuity rates over the last two decades. This combination of factors has acted to create a situation in which many people of pension age find themselves ‘asset-rich but cash-poor’.
Nowadays, there are several financial products aimed at helping people release equity from their assets in order to boost their spending power, although when market conditions are abnormal, the availability of such financial products may be very limited. One of these is the lifetime mortgage.
Under a lifetime mortgage arrangement, a homeowner takes a mortgage on their house, ‘rolling up’ the interest until the loan ends. There is therefore no monthly interest payable on the loan. The loan itself can be taken either as a lump sum or by way of monthly instalments, or a combination of both. Some plans offer an additional ‘drawdown’ facility by which further sums can be taken if required.
One of the main advantages of such schemes is that ownership of the property does not pass to the lender, which means you still retain the option to move. In addition, the ability to repay is not in point. The mortgage will also operate to reduce the Inheritance Tax (IHT) on your estate if IHT is payable.
There are disadvantages with lifetime mortgages however. One of the main potential pitfalls is that the cash released from the mortgage could affect eligibility for means-tested state benefits should your circumstances change. Also, the income generated by a lump sum when invested could affect eligibility for Age Allowance and interest earned on it might create or increase liability to Income Tax.
Another disadvantage is that repayment charges are often made if the lifetime mortgage is repaid prior to death – for example if you do decide to move house.
The sum available will depend on the age of the borrower. For a couple seeking a lifetime mortgage, the age of the younger spouse or civil partner will determine the size of the available loan. Normally, for a couple where the younger spouse is 65 years old, just under one third of the value of the property can be borrowed. For a single borrower over the age of 90 years, normally an amount in excess of half of the property value can be released.
Guarantees can be made available that no matter what happens to house prices, the total value of the loan plus accumulated interest will not exceed the value of the house.