Retirement finances can be a complex subject for even the savviest of personal budgeters. This is especially true against a difficult time for most households, which has shown conclusively the fragility which many of our financial plans can possess. As the average pound falls shorter and shorter for the average family, one cannot help but think of how remaindered many retirement pots will look in an economically-inflated future Britain.
Luckily, for those approaching retirement, there are options to help meet the challenges of a tough economy. One popular product is the lifetime mortgage – but what is it, and which might be best for you?
What is a Lifetime Mortgage?
First, it is important to define exactly what a lifetime mortgage is. Lifetime mortgages are a specific form of financial product, that belong to a family of retirement-focused schemes called ‘equity release schemes’. Simply put, equity release sees a successful applicant through to accessing a part of their home’s equity in advance, whether as a lump sum or an annuity.
The lifetime mortgage is a specific framework within this family of products, which enables access to a lump sum or annuity in advance; other forms of equity release include home reversion, wherein the lender buys all or part of your home from you and allows you to remain in it until you enter long-term care. The lifetime mortgage, though, remains the more common and popular option for retirees – partially due to the fact that it is available to 55-and-overs, as opposed to other forms of equity release which are typically made available to older retirees.
The Lump-Sum Lifetime Mortgage
There are many ways in which you can engage with the lifetime mortgage framework, but there are two in particular which bear considering – lump-sum and drawdown. Lump-sum lifetime mortgages give you access to a pre-agreed lump sum amounting to a portion of your home’s equity. This lump sum comes with a caveat in the form of an interest rate on what you take, which compounds over time; that is, the next interest added to your mortgage will apply to the current value of the mortgage, including prior interest.
Drawdown Lifetime Mortgage
Drawdown lifetime mortgages work in a similar way, but with a unique mechanism that can work in certain borrowers’ favour. A pre-agreed amount of equity in your home is made available to you, but not immediately granted to you as a lump sum. Instead, you can ‘withdraw’ from your equity reserve, with interest rates only applying to that which you withdraw. This gives you finer control over what you borrow, but often at the expense of a higher interest rate.
In either case, the best way to approach a lifetime mortgage is with a healthy degree of caution. If possible, you should pay at least the interest amount for whatever you have borrowed each month, in order to eliminate the impacts of compound interest on your final owed figure.
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