Five risks you need to consider in a lifetime mortgage

Retired Senior Couple At Home Buying Products Or Services Online Using Digital Tablet

A lifetime mortgage has its benefits, but there are five potential drawbacks, too. - Credit: Getty Images/iStockphoto

While using a lifetime mortgage can be a great way to unlock some cash, Michael Brown discusses five risks to consider

The amount of lifetime mortgages, otherwise known as an equity release product, on the market has ballooned over the last five years. In March 2017 there were 96 lifetime equity release deals in total; as of the same month this year the number has increased to 665, according to Moneyfacts data.

Simply put, a lifetime mortgage allows you to borrow money against the equity held in your home. You will not need to repay the amount you borrow until you move into long-term care or die. So, until then, you will be incurring interest charges.

So, with these options on the rise, it is important consumers are not only aware of the benefits of equity release, but the downsides too.

Interest is compounded

One of the key features of a lifetime mortgage is that the interest is compounded, which can add up significantly over time.

Consider this example, if you borrowed £80,000 at 4% you would accrue £3,200 in interest in year one. If you do not pay this back, interest can soon add up and after seven years you would owe £25,274 in interest.

Most Read

This, of course, changes if you decide to repay all or some of your monthly interest.

A smaller inheritance

In essence, the longer you live in your property the more interest you will incur and the less you will be able to pass on as an inheritance to your beneficiaries. Consider the original borrowing amount you will have to pay back too, and suddenly your estate can seem much smaller.

Borrower limits

While equity release is only available for those aged 55 and over, the younger you are the less you will likely be able to borrow. In addition to this, some lenders also require a health check before deciding your final amount. This form of financing may not be ideal for some consumers, with other options on the market possibly allowing them to borrow more on a lower interest rate.

Reduced benefits

A lifetime mortgage can also reduce or remove your access to means-tested state benefits. This is because any money you borrow will be considered as income, capital, or savings when deciding if you qualify for certain benefits. For example, your equity release plan could disqualify you from council tax reductions or pension credit.

Further fees to consider

Not only will equity release users encounter an interest rate on their lifetime mortgage, but they will need to consider other fees too. Just some that need to be considered include valuation, arrangement, financial adviser and solicitor fees. Early repayment charges are particularly important to note, because if you back out of your lifetime mortgage some lenders will charge between 3% and 25% of what you have borrowed.

To find out more on the eligibility requirements and benefits of equity release, visit moneyfacts.co.uk/retirement/equity-release.

Michael Brown is a journalist for moneyfacts.co.uk, specialising in personal finance.