What Is a Lifetime Mortgage?
If you’re nearing retirement and have a mortgage, you may be wondering if you can still apply for equity release.
Yes, you can apply for equity release with a mortgage, but you will be required to pay off your existing mortgage with some of the funds from your equity release
Some people choose to release the equity so that they can pay off their existing mortgage and no longer have to make mandatory monthly payments on their mortgage, others do it with the aim of having equity left over to spend. In this article, we’ll take a closer look at how equity release schemes work with a mortgage, and what you need to do in order to apply.
What happens to my mortgage when I take equity release?
Your equity release provider will want to have the first charge on your property and to do so will need to replace you existing mortgage lender. That is why you need to pay off your existing mortgage as part of the equity release process.
The process you’ll go through is:
- As part of the equity release application process you’ll declare:
- Your existing mortgage balance
- The mortgage provider
- Your mortgage reference
- Once a formal offer has been made by the equity release provider, your equity release solicitors will contact the mortgage provider to request and obtain a formal redemption statement.
- Your redemption statement doesn’t last long as it show’s the specific balance on a specified date and how much interest is being accrued.
- The mortgage repayment is then made by either the equity release providers solicitor or your equity release solicitor. You won’t have the responsibility of making the payment.
- You receive any leftover equity.
What’s the difference between a mortgage and equity release
There are fundamental differences between a lifetime mortgage and a residential mortgage. Let’s have a look at what they are in the table below:
|Residential Mortgage||Lifetime Mortgage|
|Minimum age you can apply.||18||55|
|Maximum age you can apply.||Can be upto 75 but the mortgage will have to be repaid before you can retire||No upper limit|
|You have the right to live in your property for the rest of your life||No||Yes|
|You retain ownership of the property||No||Yes|
|Maximum loan||Usually 4.5 times income||Based on the equity in your property and age|
|Eligibility||Based on income and expenditure||Based on Age|
|Mandatory monthly payments||Yes||No|
|Interest Rates||Depending on your agreement, typically fixed for 2, 3 or 5 years then variable.||Fixed|
|Charge against property||Yes||Yes|
For more information check out our equity release and retirement advice
As you can see the main differences between a residential mortgage and a lifetime mortgage are eligibility criteria, loan value, and interest rates.
What if I can’t release enough equity to cover my outstanding residential mortgage?
There are a number of situations that may arise when you’re considering equity release with an outstanding mortgage where you’re unable to repay the existing mortgage. Because it is mandatory that you repay the existing residential mortgage first you may be left with a shortfall.
Some of the situations where this may occur and the options available to you:
Young Borrower – The younger you are the less equity you can release from your property – around 32.1% from age 55 with the percentage increasing up until the age of 85. For that reason, you may be unable to release enough equity to cover the outstanding balance on your mortgage. As you get older you will be able to release more equity and may have less to pay so should be able to get closer to your goal of paying off your residential mortgage with a lifetime mortgage.
Interest-only mortgages – Even though you have been paying the interest on your mortgage every month, the amount you owe (the capital balance) doesn’t go down. In order to pay off your mortgage, you might need to pay more than the money you can get by releasing equity from your home.
With any shortfall you could potentially consider unsecured credit, however, you should speak to your financial adviser and make sure that this is an appropriate solution for you.
You may also be able to consider a medically enhanced equity release plan which would offer higher loan amounts or lower interest rates depending on your health conditions.
How much does an Equity Release with a Mortgage cost and what do I need to provide in order to get one?
If you have a mortgage, you will likely need to pay it back when your equity release. This is also true for any other secured borrowing. To work out exactly how to how much you can lend use a calculator.
Usually, when you get a secured loan, the lender doesn’t want to be a second charge to an equity release. This is because the equity release lender will be the first one to get paid back if there is any money left. So over time, the secured loan lender’s security in your home could get smaller and smaller.
If you have a secured loan, you can either repay it with equity release or convert it to an unsecured loan. You might find that there is little difference in your monthly payment after you switch and while it is not required, paying off unsecured debt as part of an equity release is quite popular.
If you have debt that requires mandatory monthly payments, paying it off will free up extra cash flow each month. This can be really helpful if you are struggling to make your payments. Every situation is different though, so it’s always worth speaking to a retirement specialist who can help your equity release.
How long does it take for someone to arrange and administer an Equity Release with a Mortgage on my behalf?
It typically takes eight weeks for an equity release application to complete and for you to receive your money. Some applications take as little as three weeks; however, some complicated cases can take many months.
What are the advantages of taking out an equity release with a mortgage?
One of the major advantages of using equity release with a mortgage is that over time house prices rise therefore if you’ve been in your property a significant period of time theres a strong chance that there’s a lot more equity built up in there compared with when you first bought it and you access that wealth with equity release
What are the disadvantages of taking out an equity release with a mortgage?
One of the main disadvantages of taking out equity release with a mortgage is that you will not receive the full amount of equity.
If you were to sell you home on the market you’d likely receive a lot more money than you would with equity release.
It’s also highly likely that you’ll be reducing the value of inheritance left to your beneficiaries although this is not always the case.
I already have an equity release lifetime mortgage; can I borrow more?
If you have an existing lifetime mortgage, there are alternative options to borrow extra cash. You may either:
- Use any pre-determined reserve facility’s drawdown
- Speak to your equity release provider about a further advance.
- Replace your old lifetime mortgage with a new one that accesses more funds.
The first step will be to figure out how much you owe your current equity release lender. Your equity release advisor will be able to assist you in determining which option is best for you from here.
Choosing the equity release product that’s right for me
When it comes to choosing an equity release product, it’s important to find one that fits your individual needs. Our experts at Joslin Rhodes can help you find the best option for you, so you can enjoy retirement without worrying about money. Contact us today to learn more!
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