Using lifetime mortgage to pay for elderly long-term care

If your parent is over 60, a homeowner and you need to finance your long-term care, then a lifetime mortgage might be a suitable way to release some of the money tied up in property. Take care though – these schemes don’t offer the best value for money, so they tend to be regarded as a last resort for homeowners

What is a lifetime mortgage?

It’s a type of equity-release scheme that lets you use some of the money that’s tied up in your home. You could use this to pay for long-term care but only if you’re looking to stay in your home. With a lifetime mortgage, you borrow money against the value of your home, and then repay it when the house is sold

Lifetime mortgages are one of the two main types of equity release. The other is a home reversion plan

How do lifetime mortgages work?

Like any mortgage, a lifetime mortgage is a loan secured against your home

The loan can either be taken as a lump sum or in amounts drawn down over a set period or for life. Interest is charged on the loan, which you either pay, or more typically, allow to roll up

If you draw down the loan, you only pay interest on the amounts you take from the time you take them

When you die or move out, your home is sold and the money is used to pay off the loan. Anything that’s left over goes to your beneficiaries. If there isn’t enough money left from the sale to pay off the loan, your beneficiaries would need to make up any shortfall from your estate

To guard against this, most providers offer a no-negative-equity guarantee. This means that you (or your beneficiaries) won’t have to pay back more than the value of your home, even if the debt has become larger than this.

There are three different types of lifetime mortgages to choose from:

• a roll-up mortgage
• a fixed-repayment lifetime mortgage, and
• an interest-paying mortgage.

Roll-up mortgage

With a roll-up mortgage, interest is added to the loan. You don’t make any regular payments, but the amount you originally borrowed, plus the rolled-up interest, needs to be repaid when your home is eventually sold. The interest you owe can grow quickly, because, unlike a repayment mortgage, the amount you owe is growing all the time

Fixed-repayment lifetime mortgage

You don’t pay any interest, but a repayment amount is agreed in advance that is higher than the loan. When your home is sold, you have to pay the lender this higher amount. This can work in your favour if you end up living much longer than the lender thinks you will. But if your home has to be sold much earlier than you planned, you will get a worse deal

Interest-paying mortgage

You pay the interest on some or all of the loan monthly, rather than allowing it to roll up. When your home is eventually sold, the amount you originally borrowed is repaid. Interest rates can either be fixed or variable. Take special care with variable interest rates – you’ll never know exactly how much you’ll be paying

How much equity could you release?

This will depend on a number of factors, such as how much your property is worth, your outstanding mortgage and age

Key safeguards

The Financial Conduct Authority (FCA), the UK’s financial services regulator, regulates lifetime mortgages. This means that firms advising on or selling these products have to meet certain standards and provide clear complaints and compensation procedures

What are the pros and cons of lifetime mortgages?

Pros

• They can provide a guaranteed monthly income or a large lump sum.
• You get to keep and stay in your own home.
• The loan is only repaid on death or the sale of your property.
• There’s the potential to benefit from any future increases in the value of your property.
• Fixed rates prevent interest spiralling out of control.
• Many schemes guarantee the total debt cannot exceed the value of your property.
• When the house is eventually sold and the debt paid off, there may be money left over to provide some kind of inheritance.
• The equity released on your main property is tax free.
• Equity-release schemes can help to reduce your Inheritance Tax liability.

Cons

• The inheritance you pass on to your beneficiaries will be substantially reduced and won’t include your home itself.
• They can be inflexible if your circumstances change – you’ll usually need the provider’s permission for someone else, such as a relative, carer or new partner, to move in.
• They might affect your entitlement to benefits, as any money you raise through equity release is likely to affect the assessment of your income and capital.
• You might need to pay arrangement, valuation and legal fees.
• If you sell up or die soon after taking out a plan, your estate could incur a loss.
• You might not be able to transfer all of the debt if you move to a smaller property.
• You will be required to have buildings insurance.
• Lenders will expect you to keep your home in good condition, so you will need to set aside some money for repairs and maintenance.

Remember, you’ll still be responsible for paying your utility bills and Council Tax, so you’ll need to make sure you can afford these.

Lifetime mortgages versus other ways of funding care

So how do lifetime mortgage schemes compare to other means of funding your long-term care, such as downsizing, insurance policies and investment products?

Equity-release schemes don’t offer the best value for money, so they tend to be regarded as a last resort for homeowners. Downsizing is a more cost-effective option that can free up the money you need and allow you to maintain your financial independence. It can be both time-consuming and stressful though, and you’ll have to move from your current home

myageingparent has teamed up with Grace Consulting to offer you expert care advice

Grace Consulting provides affordable fee-based independent advice to help you choose the best care option to suit you and your relative’s needs and wishes. Our Care Advisers provide the knowledge and support you need to make the right decision for you and your family. myageingparent.com is partnering with Grace Consulting, the UK’s leading provider of personalised independent care advice, who, for over 40 years, has specialised in finding the best possible care for older people. Please note this is not an Age Concern or Age UK service.

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This article is provided by the Money Advice Service.