Financial literacy is not an easily learned subject in the UK. Present financial difficulties have made it all the harder for us to properly reckon with our medium- and long-term finances, particularly retirement – which, for many, has taken a back-seat in favor of short-term financial wellness. Retirement planning is multifarious, and there are numerous things to consider (pensions, savings, and State Pensions amongst them), but another increasingly popular part of the puzzle is the lifetime mortgage.
Understanding Lifetime Mortgages
Before we continue, it is imperative that you understand exactly what a lifetime mortgage is and what it can entail for you in the long term. Lifetime mortgages belong to a category of financial products referred to as ‘equity release’ schemes; these are retirement-targeted lending schemes wherein your household is a crucial element. Equity release schemes present themselves as processes by which you can access some of your home’s value in advance; in practice, you are using your home as the security for a long-term loan.
One of the most popular formats for this kind of scheme is the lifetime mortgage; it affords you a portion of your home’s equity either as a monthly payment over a pre-agreed period of time or a lump sum at the start of the agreement. Most lifetime mortgages expect nothing in the way of payment from you until your home is sold or you pass into later-life care. The catch is that lifetime mortgages are provided with interest, meaning that the total owed by the end of the agreement can be much greater than that at the start.
Your Financial Plan
The lifetime mortgage, then, can be a powerful asset for the earlier days of retirement, especially so when received as a lump sum. This money can be used well towards a number of unique challenges inherent to the sunset years – and which we will explore shortly. However, there is risk in the form of that interest rate, which compounds if not dealt with.
As such, you should have an airtight financial plan that figures your lifetime mortgage into it. Paying at least the value of interest added to the lifetime mortgage each month can keep the value owed the same later on, protecting the rest of your investment for your estate and for disbursement to your family.
The Challenges of Retirement
While lifetime mortgages present risk and potentially more than some retirees would be willing to shoulder, they can also be indispensable for covering some key costs associated with leaving work. You might need to make some accessibility-inspired renovations to your property in order to enable continued freedom around your home when you become much older. You might need to make some quality-of-life upgrades to your heating system in order to reduce ongoing costs and make yourself more comfortable. Of course, you may simply want to fund an extravagant bucket-list trip – and why not?
Featured Image by Oleksandr Pidvalnyi from Pixabay