What are the average interest rates of a lifetime mortgage?

If you are looking to free up some of the equity that is tied up in your home then an equity release product such as a lifetime mortgage may help you be able to do this without the need for you to move home or downsize.

However it may sound simple but it could be a very costly option in the long run. 

Typically the interest rates are a lot higher than those of a standard mortgage which currently stand between 2-3%

What is a lifetime mortgage? 

A lifetime mortgage is offered to those over the age of fifty-five and is a loan that is secured against your property.

With traditional mortgages you are expected to make regular monthly payments until the total loan amount is paid off.

With a lifetime mortgage there are no repayments necessary until the time comes when you pass away or enter into a long term care facility. When this happens, your house will be sold and the proceeds from the sale will go towards paying off your lifetime mortgage.

There are different options for a lifetime mortgage – 

  • Interest Roll Up Mortgage – On any lifetime mortgage you will be charged interest. However with an interest roll up mortgage this interest is added onto your total loan amount and will be paid off after the sale of your house. Of course this does mean that the total amount payable will quickly increase. 
  • Interest Paying Mortgage – Once again interest is added to your mortgage however you can choose to make monthly or ad-hoc payments to cover the interest amount ensuring that your total loan amount does not increase rapidly. 
  • Drawdown Lifetime Mortgage – Rather than receive one lump sum of money you will receive an initial smaller amount and the rest will be kept in reserve. You can drawdown the reserve amount as and when you want to. This is a popular option amongst borrowers as you are only charged interest on the amount you drawdown. 

What are the average interest rates? 

Many lenders offer fixed or capped interest rates which average around 5% although there are some that are as low as 3%.

Typically the interest rates are a lot higher than those of a standard mortgage which currently stand between 2-3%

Are they any other fees involved?

When obtaining your lifetime mortgage there will be other fees involved that cannot be added onto your mortgage and will need to be paid at the time.

These include – 

  • Arrangement fees
  • Valuation fees
  • Legal fees

NOTE: If you decide to pay off your mortgage early you may also be subject to an early repayment fee. Do be sure to confirm this with your lender before committing to your lifetime mortgage. 

How can I keep my total loan amount at the minimum? 

  • Only borrow what you need – The drawdown Lifetime mortgage is an excellent idea for those that want to keep their total amount repayable at the minimum. As you are not charged interest on the amount of money in reserve. 
  • No Negative Equity – When choosing which lender to take out your lifetime mortgage with, ensure that they are a member of the Equity Release Lender. These lenders have to abide by the No Negative Equity rule, which means that you will never pay back more than what your house is valued at.
  • Means tested benefits – Do keep in mind that a lifetime mortgage may affect any means tested benefits that you are in receipt of.  

Before taking out a lifetime mortgage it is always advised to speak to a qualified mortgage broker. Not only will they have the knowledge and expertise to inform you on whether having a lifetime mortgage is the right financial decision for you but they will be able to find you the best mortgage that suits your needs as you go into retirement. 

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