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Busting the common lifetime mortgage myths

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Written by: YourMoney.com
05/07/2018
For those approaching the age of 55, you may be wondering how equity release works. This guide busts the myths surrounding lifetime mortgages – a type of equity release scheme.

Lifetime mortgages can provide money for your retirement without the need to make regular repayments.

This type of equity release scheme gives you a cash lump sum now, or regular income for the rest of your life, and you don’t have to worry about the repayments. Typically, interest accumulates over time and is repayable when you die, or move into long-term care and sell your home. When this happens, the capital and the interest are repaid in one lump sum from money raised from the sale.

But, Nici Audhlam-Gardiner, MD of OneFamily lifetime mortgages, says there tends to be a lot of confusion on how they work as they’re often compared to the equity release products of old.

She says: “The market now is very different and there are lots of different types of lifetime mortgages to suit different lifestyles and needs.

“A particularly common misunderstanding is that the interest is added yearly and can only be paid at the end of the loan meaning there is a lump sum to pay, whereas although these are available, there are plenty of other options enabling homeowners to protect the capital in their property.

“People also think there are limits on what they can use the money for, whereas actually homeowners can choose how they spend it.”

Lifetime mortgage myth busting

The below are based on common web searches. Here’s what you need to know, courtesy of OneFamily:

I could lose my property if I take equity out of it

All members of the main trade body, the Equity Release Council, offer a ‘no negative equity guarantee’, which means even if the housing market crashes and homes drop in value, you’ll never owe more than the value of your home, or be expected to move out.

Does a lifetime mortgage last a lifetime?

Homeowners can actually pay the money back whenever they want, though you’ll likely incur early repayment charges dependent on how long the mortgage has been in place. You may have the option to downsize after a number of years, or transfer the mortgage to a new property, without paying any fees.

I won’t be able to leave my family an inheritance

Compound interest on a lifetime mortgage is a choice. There are different products on the market where homeowners can pay the interest on a monthly basis, meaning only the original loan amount is left. You may be able to pay a certain percentage, eg 10% of the loan each year without incurring fees, helping reduce the interest and capital. For example, if you take a £100,000 loan, you could pay back up to £10,000 each year.

I’ll pay tax on the money from a lifetime mortgage

No, the money taken out of a property with a lifetime mortgage is tax free.

There are controls on what lifetime mortgage funds can be spent on

When a homeowner takes a lifetime mortgage out on their property, what they do with the funds is completely up to them. Common reasons include using the funds to pay off existing debts, gifting a sum to other family members, a holiday of a lifetime or a holiday home, starting a new business venture or to make home and garden improvements, such as a ‘granny annex’.

I can’t sell my home if I have a lifetime mortgage

There are different options with lifetime mortgages meaning you may be able to downsize after a certain number of years without incurring additional charges. You may also be able to transfer your lifetime mortgage to a new property.

A lifetime mortgage will devalue my house

Check if your lifetime mortgage provider uses independent surveyors to survey properties being lent on, such as OneFamily, which should ensure properties are valued at the current market price.

If I take a joint lifetime mortgage and my partner dies, I’ll have to move out/sell

If both names are on the lifetime mortgage, the surviving partner keeps the house and the mortgage until their situation changes.

A lifetime mortgage is for people with a low or no income

Lifetime mortgages are different to standard residential mortgages and homeowners are not subject to any kind of affordability check.

Are lifetime mortgages a con?  

Lifetime mortgages can only be taken with advice from a fully qualified financial adviser.

I can only have one lifetime mortgage at a time

Homeowners may be able to  have more than one lifetime mortgage depending on the provider. Some may specify you need to live in the property as your main residence, while others offer buy-to-let lifetime mortgages.

My family won’t have any control of what happens to my home

The property remains owned by the homeowner and if they die it will go to their chosen beneficiary. The beneficiary then has up to 12 months to pay back the lifetime mortgage. This can either be done by selling the property or they can choose to pay the money themselves and keep the property. This is the same if the homeowner goes into long-term care.

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