A Lifetime Mortgage is a housing loan, but with no immediate repayments and the borrower can continue to live in their own home. This type of loan is usually offered only to home owners who are in their 70’s and are mortgage free.
In this case an older home owner can borrow funds on the security of the property, on an interest only basis and usually at a fixed rate. The interest payments are not paid but added to the loan amount, i.e. capitalised or ‘rolled up’ each year. So the loan is continuously increasing.
The loan term is usually until the death of the home owner, or earlier if they move into long term residential care or move out of the property. In the meantime, the borrower can reside rent free in the property. The amount of loan available is typically 10%-50% of the value of the property. The older the borrower the higher the loan percentage he or she can borrow, the loan can be taken as a lump sum or in instalments.
Repayment of the loan is payable on death (or earlier as the case may be), the property will normally be sold and the then outstanding loan is repaid. Some lenders may insist that the loan is paid off if one of the following occurs, this means that the property must be sold if:
The borrower moves out of their home for longer than six months.
The house is not insured.
The house is not maintained to a standard the lender believes will maximise its market value.
Because the interest is not paid but added to the loan amount each year, the loan outstanding can grow very quickly. (interest paid on interest). The interest rate charged for lifetime mortgages is usually higher than the normal home loan interest rate. This could also mean that the loan build up would surpass the value of the potential sale of the property if the value of the property did not also grow.
Some lifetime mortgages have a “no negative equity” clause’, so should there be a shortfall between the sale price and the loan amount this will not be collected from the borrowers estate.
Some lifetime mortgages are “Reversible”, meaning that the borrower can sell the property and repay the loan. Also, some are “Irreversible” and the loan can only be repaid after death of the borrower or where the borrower moves into long term care.