An enhanced lifetime mortgage is a hybrid of the very popular lifetime mortgage facility, available to those over 55. The traditional lifetime mortgage is an opportunity to release equity in your property without regular monthly repayments. An enhanced lifetime mortgage takes into account your health which could lead to an increased loan-to-value (LTV) ratio. There are many factors to consider, so it is important to take financial advice.
What is a lifetime mortgage?
A lifetime mortgage offers the chance to release equity in your property with no regular repayments. The interest on a lifetime mortgage is rolled up and repaid at the end of the term, together with the initial capital. The duration of a lifetime mortgage is open-ended; upon the death of the homeowner, or when they move into full-time care, the property is sold. At that point, the mortgage company would receive a capital repayment together with accrued rolled-up interest. Anything left goes directly to the homeowner or their estate.
What is an enhanced lifetime mortgage?
The LTV ratio for a traditional lifetime mortgage tends to be between 25% and 50%, although some companies will offer a higher figure via an enhanced lifetime mortgage. You will often see enhanced lifetime mortgages referred to as “impaired lifetime mortgages”. Applicants with health issues may have the opportunity to increase the traditional lifetime mortgage LTV ratio, thereby raising more capital. Why?
With a traditional lifetime mortgage, the term of the repayment is open-ended. So, if somebody was to take out a lifetime mortgage aged 55, in theory, the mortgage could last more than 40 years. This means the mortgage company’s capital is tied up for a significant period. Where the applicant has health issues, this would likely mean a relatively short mortgage term. A shorter term will attract a reduced rolled-up interest charge, and reduced uncertainty/risk over the value of the property, therefore offering the ability to increase the level of equity release.
What are the main factors affecting an enhanced lifetime mortgage?
There are numerous factors to take into account when applying for an enhanced lifetime mortgage. Different mortgage providers will have specific requirements, but some of the more common considerations include:
- Body Mass Index (BMI)
- Smoking habits
- Blood pressure
- Medical history including heart problems, strokes, etc
- Conditions such as Parkinson’s, Multiple Sclerosis and Dementia
- Prescription medication
- Retirement due to ill-health
- Cancer diagnosis and treatment
An applicant whose health is impacted by any of the above factors will likely be able to apply for an enhanced lifetime mortgage.
Do I need to pass a mortgage affordability test?
In later years the employment and income status of individuals/couples can often change dramatically. Traditional remortgaging applications include a mortgage affordability test based on your regular income. Consequently, many looking to remortgage in later life fail this test. As interest is rolled-up with an enhanced lifetime mortgage, there are no regular repayments and therefore no need for a mortgage affordability test.
What is the difference between a remortgage and a lifetime mortgage?
In addition to not having to undertake a mortgage affordability test, the following differences also apply:
A traditional remortgage will tend to be repayment (capital and interest) or interest only. A lifetime mortgage does not require any monthly repayments. Interest is rolled up and paid at the end of the lifetime mortgage together with the capital.
Term of agreement
You will find traditional remortgages all have a defined term at the outset while a lifetime mortgage is “open-ended”. It is only when the homeowner dies or moves into full-time care that the property can be sold, and lifetime mortgage capital plus rolled-up interest repaid.
Interest rates for lifetime mortgages tend to be higher than those for traditional remortgages. This is because of the open-ended nature of the arrangement and greater competition in the traditional remortgage market. This may change in years to come, as life expectancy continues to rise, leading to increased demand for lifetime mortgages.
Is there an age limit for enhanced lifetime mortgages?
The minimum age limit for an enhanced lifetime mortgage tends to be around 55. When applying for a joint enhanced lifetime mortgage, lenders take the age of the youngest applicant into account. The older you are when you apply, the greater the amount you can borrow as a percentage of the value of your property. In theory, there is no upper age limit regarding enhanced lifetime mortgages. The Nationwide Building Society will accept applications up to the age of 95.
Can you pay back a lifetime mortgage early?
For many people, the main reason for taking out a lifetime mortgage is the fact there are no monthly repayments. That said, many arrangements offer the opportunity to repay interest or capital on an ad hoc or regular basis. This will reduce the final repayment figure when the mortgage is repaid and leave an increased level of equity for the homeowner/their estate.
How long does it take to get an enhanced lifetime mortgage?
Assuming there are no complications with the property title, an enhanced lifetime mortgage should take anywhere between 4 to 6 weeks to complete. This compares favourably to traditional mortgages and remortgages. The risk factors associated with an enhanced lifetime mortgage are well defined by the mortgage companies, allowing a relatively swift response.
What is an enhanced lifetime mortgage drawdown facility?
An enhanced lifetime mortgage should, in theory, lead to an improved LTV ratio over a traditional lifetime mortgage. While many applicants choose to take these funds in one lump sum, this is by no means set in stone. You may wish to take a lump sum at the outset and drawdown payments as and when required going forward. It is worth noting that elements of the enhanced lifetime mortgage drawn down at a later date will only attract interest from the drawdown date. This can offer a useful means of budgeting going forward and a saving on interest charges.
Could I fall into negative equity with an enhanced lifetime mortgage?
An enhanced lifetime mortgage is structured to create significant headroom between total financial liabilities and the value of the property. In the unlikely event that the property was to slip into negative equity, the enhanced lifetime mortgage provider would need to cover the cost of any shortfall. This is why the LTV ratio tends to be relatively low, allowing room for property price movements and rolled up interest charges as well as the repayment of capital.
Understanding enhanced lifetime mortgages
The shorter your life expectancy, the higher the potential LTV ratio with regards to an enhanced lifetime mortgage. This is because of the reduced rate of rolled-up interest and risk factor associated with traditional open-ended lifetime mortgages. It is important to take financial advice when looking to take out an enhanced lifetime mortgage, so you are fully aware of the pros and cons.