What's a Lifetime Mortgage?

A lifetime mortgage: It's the next big thing in the world of homeowners. For those wishing to unlock the equity in their homes and use it now, lifetime mortgages are all the rage, particularly among those nearing retirement age. Are lifetime mortgages wise? How do they work?

A lifetime mortgage means that you are borrowing against the equity in your home. You continue to live in the property, and there are no interest payments on the mortgage during your lifetime. Essentially, a lifetime mortgage is only repayable when the borrower dies or moves into long-term care, at which time the interest is calculated and the total amount of the loan is paid off through the sale of the property.

The main benefits of a lifetime mortgage are simple: You are able to use the equity in your home, whereas under normal circumstances you may not be alive to do so. This is why more and more retirees are turning to lifetime mortgages to fund their retirements. The market potential is growing faster as the population ages and as fewer and fewer retirees have enough income to live on. In 2004 alone there were 25 times more lifetime mortgages than there were ten years ago.

So what are the drawbacks to a lifetime mortgage? The first one, and the one that concerns people the most, is obvious: Upon the death of the borrower, the property will pass out of the family hands. The traditional reason many people purchase property in the first place is so that they have something to leave to their children; but with a lifetime mortgage, the property will be sold upon the borrower's death to pay the balance. With some people, who aren't interested in leaving property behind, have no need to do so, or have no descendants, this is not an issue. However, it's important to note that what with market fluctuations and compounding interest rates, the amount the property garners at auction may not be enough to cover the total balance of the mortgage. In that case, someone else will be held responsible for covering the difference upon the borrower's death.

As you can see, it's a tricky process. Depending on the value of your home, the interest rate you're able to net, and the amount you plan to borrow against your equity, a lifetime mortgage can be a helpful tool. The chance to release equity from a home is a great opportunity for those nearing retirement to get a chance to actually, well, retire. But the risks involved are worth weighing before you take the actual step of releasing your equity through a lifetime mortgage.