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Buying a property with a lifetime mortgage

Most people associate equity release in the form of a Lifetime Mortgage as a vehicle for releasing cash from their existing home to cover essential expenditure, to fund gifts to other people, perhaps as an early inheritance, or to pay for luxuries they might not otherwise be able to afford.

It is not commonly known that a Lifetime Mortgage can be used to buy a new or additional property for personal use. It may be a new idea to you, there are even estate agents who are not aware that somebody with a lower income and already in retirement can secure a mortgage.

When might you want to purchase a home using an equity release product?

We have been able to help people buy a new home in retirement for a number of other reasons.

For example, to reconnect with family in a different part of the country or move to a more attractive area.

Sometimes borrowing is relatively modest and only needed to cover immediate costs. At other times there could be a big difference in property prices, so a greater part of the purchase price comes from borrowing.

Some people want to move to a home which will be more retirement friendly although we’ll talk later on about the types of property a lender will find acceptable.

Even if you have enough cash to buy your new home outright, you might decide to keep some of it back to cover furnishing or adapting the new home, or just because you want to use the money to fund a more comfortable retirement.

One increasingly common scenario people are faced with in later life is the prospect of separation and divorce.

Here, a Lifetime Mortgage might be used to help buy a new independent home that you wouldn’t be able to afford or buy a place which is more comfortable than is available from the cash available.

If you find yourself in this position, you should also look at our blog called Equity Release and Divorce in Later Life.

Whatever the reason, you should speak to an adviser as early n the process as possible so that you have a realistic expectation of what is possible.

It would be a shame to get your hopes up about a dream retirement home only to find that it is just out of reach.

What kinds of property are available?

Equity release lenders use the same criteria for assessing whether a property is suitable as security as standard mortgage lenders.

They want to be reasonably certain that the home will hold its value and be easy to sell by the current owner or the beneficiaries of their estate.

Very large properties or those with non-standard construction such as certain types of timber frame or pre-cast concrete construction might be difficult.

We cannot approach every lifetime mortgage lender where the walls have only a single course of bricks or a flat roof, but we are happy to do the research if you have a specific property in mind.

Although it might be unexpected, equity release is not usually available for retirement homes designed specifically to provide a sheltered home for those in later life.

Community-type properties with wardens on site and options such as medical facilities which have a large regular service charge are unlikely to be mortgageable.

Again, give us a call to chat it through with one of our equity release experts.

What are the potential costs?

Like any mortgage, you will have to fund some costs associated with the purchase although, given the nature of your situation, you might prefer to add these costs to the mortgage.

We can usually find a mortgage option with no arrangement fee which offers a free valuation. However, you might want to consider an independent survey to ensure that your new home is not going to require expensive work to correct any defects.

Because this is a complicated process which needs constant attention, there is likely to be a fee to the adviser – we sometimes charge up to £995 depending on the complexity of the case.

You will need a solicitor who has experience in equity release, and their fee may be around £1,200 or more with extra costs associated with leasehold properties.

You will also have to consider stamp duty land tax – you can get an idea of the stamp duty payable by searching for a stamp duty calculator on the net, but you should also confirm the amount as early as you can with your solicitor.

They are responsible for collecting and remitting the correct amount to the tax office.

There will be other costs depending on your situation, the amount of furniture and personal goods that are to be moved and the distance involved.

You should also budget for decorating and refurbishment, or perhaps landscape gardening or other work inside the home to future-proof it against the needs of somebody getting older.

What is the process for using a lifetime mortgage to buy a property?

If you have bought a house before, this is likely to be familiar. We suggest you talk to an adviser about your needs as early as possible so they can guide you on the maximum you would be able to borrow.

You can then set about house hunting to find the property in the area you want which meets your needs, or which can be suitably adapted. It is helpful to engage a solicitor in advance so preparatory work can be done, and time saved later.

When you have had an offer accepted, we can apply for the mortgage on your behalf and keep a regular eye on progress. Lenders do not need to assess your financial position so provided you and any joint applicant meet their age requirement for the amount requested, they will appoint a valuer to inspect the property.

Once the valuer has provided them with comments, the lender will issue you with a mortgage offer and send a copy to your solicitor who can start the legal work.

One significant difference between a lifetime mortgage and a standard residential mortgage is the term over which the offer remains valid.

Many lifetime mortgage offers are valid for only a few weeks rather than a few months which means that, if the time taken to complete the purchase goes beyond the offer expiry date, the offer may have to be re-issued.

Your adviser will arrange for that on your behalf although there is a possibility that interest rates will vary – either up or down.

When all of the legal work is done, your solicitor will arrange for exchange of contracts which is when you are committed to the purchase.

Within a week or so of exchange, you will come to completion where money changes hands and you become the new owner.

Before completion, you will need to pay any personal funds for the purchase to your solicitor. On the day, if you are selling a property, your solicitor will receive any money from that sale plus the funds from the Lifetime Mortgage. Any surplus will be paid into your bank account.

Congratulations, you now own your new home.

Does the Lifetime Mortgage interest have to roll up?

What happens with the mortgage is up to you. If you would like to limit the impact for your beneficiaries you can pay some of all of the interest every month, or let it roll up into the mortgage amount.

It is a requirement of lenders affiliated with the Equity Release Council that they allow you to pay down some of the capital borrowed and there is usually a limit of around 10% of the amount borrowed that can be paid every year without a penalty charge.

Payments can be made either every month or whenever you feel that you have enough in the kitty to make a payment.

Whatever you decide, you can decide to stop payments if you decide you would prefer to use the money for other things.

What about the future?

The mortgage remains in place until the last mortgage holder dies or is forced to go into full-time residential care. At that point, the estate has a year in which to sell the property and repay the Lifetime Mortgage.

The “no negative equity” guarantee means that the amount due to the lender can never be more than the market value of the property and your home can be left to one or more of your beneficiaries provided they can pay the mortgage.

Can you move home? Yes, the lender will often transfer all or part of the mortgage to another property but there will be costs involved.

Can you borrow a bit more? One of the options at the point of purchase is to reserve a fund which can be drawn down when it is needed. If this is not adequate, it may be possible to apply for a further advance depending on your age, the property value and the mortgage outstanding.

A Lifetime Mortgage is a very flexible approach to buying a home in later life. Without any obligation on your part, we’d be very happy to talk it through with you.