Later life lending provides homeowners over the age of 55 with the option of releasing funds. This guide explains everything that you need to know about this option.
Are you looking for ways to improve your quality of life in your later years? If so, then you might want to explore the option of later life lending. Later life lending means releasing funds that you might already (have in your home). You can use these funds for a range of different purposes and you have complete freedom to spend it how you want. Later life lending provides an alternative to some other possibilities that people can use to boost their income. It’s worth noting that consumer interest in later life lending has steadily been increasing. More than 19,000 new plans were taken out in the first half of 2020 compared with 10,000 in the first half of 2010.
Part of the reason for this is almost certainly the fact that pension schemes are not able to support the new levels of life expectancy which have also risen over the past 20 years. The home is the most valuable and largest asset people have, so it makes sense to explore how part of the home could be realised to fund future plans and lifestyles.
How Does Later Life Lending Work?
Later life lending is formed of two options. You can receive a lump sum or an income for a part of the value of your home. You can do this either by using a Lifetime Mortgage or selling a percentage of your home with the agreement that you can continue to live in the home for as long as you like. You can choose to repay the mortgage or buy back the percentage sold from the provider if your circumstances change.
The two most popular forms of later life lending are lifetime mortgages and home reversion.
A lifetime mortgage involves borrowing a sum that takes the form of a mortgage. This is eventually repaid from your home sale when you pass away or move into long-term care. The amount you borrow can be anywhere between 18% and 50% of the value of the property, this percentage increases with age.
The amount owed could grow due to interest added if you decide not to make any monthly repayments. However, it is possible to handle this by paying off the interest over the next several years. This is often referred to as an interest-paying mortgage. If you don’t pay off the interest, then you will have an interest roll-up mortgage. The advantage of this is that you will not have monthly repayments to make. The disadvantage is that the interest builds more quickly as it compounds over the years, and could therefore reduce the equity in the home.
It’s also worth noting that you may consider applying for an enhanced lifetime mortgage. This means that you could potentially borrow more and this option will be available if you have an unhealthy habit or a significant health condition that is going to impact your life expectancy.
With this option, you can sell all, or part of the property, however, you retain the right to continue living there until you move into long-term care or you pass away. The money can be paid in the form of a regular income or a lump sum. You can choose this based on your individual financial circumstances and which option would benefit you the most.
It is worth noting that when you sell part or all of your home, you won’t receive the full market value. For this reason, most people often decide to opt for a lifetime mortgage instead. Some providers of later life lending schemes will only provide this option if you are over 60. The older you are, the more money you are likely to receive, as your life expectancy is shorter. A variety of factors are also considered such as your health, any existing conditions, if you are a smoker for instance, then you will likely get a larger return of the value for your home that you sell to the provider.
Benefits Of Later Life Lending
Later life lending will provide you with numerous benefits. Firstly, it’s important to understand that you can use the funds that you release for a wide range of different purposes. You are able to use the money raised, in any way you choose. You can cover debts and mortgages or make improvements to your home. You could boost your income to ensure that you can live more comfortably. This is often a good option for those who find their pension income alone is not sufficient to cover their living costs or lifestyle.
Later life lending may also be used as a way to help family members in need or pay for something that you want such as a once-in-a-lifetime trip. A lot of people hope to travel the world during their retirement. Later life lending means that this becomes a real possibility worth exploring. Another key advantage is that any money that you release is tax-free. You don’t need to worry about a portion of this money falling into the hands of the government.
Many often have the misconception that if you explore later life lending options, then you will lose your home. This needn’t be the case. In reality, this option provides an alternative that could be more beneficial. As mentioned, you can use the money to make changes to your home to ensure that it suits your needs as you continue to age. As such, there’s no reason to lose the house that you love and that your family has grown up in. Similarly, many providers allow you to move home if you wish to or repay the loan from the equity of a sale at a later date, so you are not tied to the arrangement forever if your needs or wants change.
Another common misconception is that later life lending will tie you to making various monthly repayments. You could be worried about this putting pressure on your finances. The good news is that you won’t have to make monthly payments unless you want to. You will also never owe more than the total value of your property. There is no negative equity guarantee and that also means that you don’t have to worry about any of this impacting your family once you pass on or move into long-term care.
With many borrowing options, there are going to be limitations on when and how you can borrow the money. However, with later life lending possibilities, you can always access the money you need when you want it. You can choose to take out a lifetime mortgage or you can think about exploring a lump sum. A lifetime draw-down mortgage will mean that you get smaller amounts of cash over an extended period, as and when you wish to access the funds, and you only pay interest on the funds taken, not on what is still available to you. This essentially works as a more traditional income.
As mentioned, a lot of people do use later life lending to provide cash to family members. It is increasingly difficult for first-time buyers to get on to the property market as house prices have increased over the years, many parents and grandparents are choosing to pass their loved ones their inheritance early, to help them with their first purchase. This means they have the pleasure of seeing how their gift impacts the lives of their loved ones whilst they are still present.
Are There Any Issues?
Later life lending options will reduce the amount of inheritance received by your beneficiaries. However, they could get more from the sum that you free up. You also won’t be getting the full value of your home when you sell.
Is It the Right Choice for You?
If you are over the age of 55 and you own a property, then there’s no real reason why you shouldn’t explore later life lending options and schemes. This can be suitable for a wide range of budgets and requirements. You don’t need a certain value on your home or to be in a particular financial situation. It’s particularly beneficial if you want to make sure that you can avoid selling your home, to free up some extra cash that you can use.
However, you do need to make sure that you approach later life lending the right way. First, you should consult with an independent financial advisor or a mortgage broker. They should be able to offer you completely unbiased advice so that you will be in the most informed position, and feel more able to make decisions on future plans and finances. They can also help ensure that you are able to find the best deal on the market.
It is very important to ensure that you use an accredited provider. This will help you avoid any pitfalls such as negative equity. Next, think about what the right form of later life lending is going to be right for your family. This is going to depend on a wide range of different factors and variables, including how much money you want to leave your family members.
You should also aim to free up funds in stages. This is often going to be more cost-effective compared with borrowing everything that you need straight away. You should make sure that you look at numerous small loans. That way, you can avoid paying a large amount in interest. Remember, you can also pay off any interest as you progress. This can stop the costs from building up over time.
We hope this helps you understand the basics of later life lending and whether it might be the right choice for you. By exploring this option, you likely will be able to achieve a better quality of life in your later years and avoid selling your home at the same time. Remember, regardless of your future plans, later life lending could make it easier to reach your financial goals.