The Intermediary – July 2025 - Flipbook - Page 25
L AT E R L I F E L E N D I N G
In focus
Lifetime mortgages
and the ‘Bank of
Mum and Dad’
M
ore than half of
first-time buyers
received financial
assistance geing
on the housing
ladder last
year, with 173,500 first-time buyers
receiving £55,572 on average, and the
‘Bank of Mum and Dad’ providing
£38.5bn of assistance over the past four
years. This research, from property
firm Savills, confirms what we have
known for a while; an incredible
amount of wealth is tied up in
property, an illiquid asset.
To access it and help children onto
the ladder, parents oen sell their
home or take some form of mortgage
against it. Given the older age profile
of first-time buyers, parents also tend
to be a bit more advanced in years and
may find their options limited, which
is where a lifetime mortgage comes in.
In addition, there may be an
Inheritance Tax (IHT) benefit if the
donor lives more than seven years
aer making the gi. Giing means
they not only get to see the recipient
enjoy their money, it may be a
potentially exempt transfer with no
IHT to pay aer seven years.
The borrower takes out the
mortgage against their home, which
is repayable on their death or earlier
move into care, chooses whether to
make interest payments or not, and
when the house is sold, the lender gets
its money back with the balance going
to the borrower or their estate.
As there is no obligation to make
monthly payments, lenders don’t look
at an affordability model; instead, the
age of the borrower(s) and value of
the property are considered. Lifetime
mortgages are aimed at borrowers
aged 55 and above, based on the age of
the youngest borrower in the case of
joint applicants.
The lender calculates the maximum
loan-to-value (LTV) it is prepared
to advance; the older the client, the
more they can borrow, and there
is no maximum age limit. As with
mainstream residential mortgages,
cheaper rates are available at
lower LTVs.
The rate is fixed for life, giving
certainty of cost and security of
tenure. Lifetime mortgages are
portable, so in theory can be taken to
another property if downsizing at a
later date. In this scenario, the lender
may require a partial repayment to
keep the LTV the same as before,
but there are no early repayment
charges (ERCs), only legal costs and an
administration fee.
One issue that may arise with
porting is if the property itself does
not meet the lender’s criteria, but
downsizing protection can be built
in if moving is a possibility to avoid
expensive ERCs.
The ERCs themselves have
significantly changed – historically
they were variable and applied for
the duration of the loan, linked to the
yield on 15-year Government gilts on
redemption.
Now, lenders offer straightforward
percentage-based tapering ERCs over
five to 15 years, so if rates fall, it may
be possible to remortgage to a cheaper
product in future without paying
a penalty.
Other uses
I oen come across clients who use
lifetime mortgages for funding care;
they don’t want to take all of the
funds upfront and pay interest, so
they might take 12 months’ worth of
costs, and then every 12 months do
a further drawdown. Other clients
are using lifetime mortgages to repay
an expiring interest-only mortgage
ANDY SHAW
is head of later life lending
at SPF Private Clients
where there is no repayment vehicle
in place because it turns out that they
don’t want to downsize yet, as was the
original plan. Others use them for
lifestyle reasons – they may want to
fund holidays or buy a new car.
Lifetime mortgages are also used
to bridge the retirement funding gap
by downsizers who find that once
costs and Stamp Duty have been paid,
there’s not much le.
If downsizing leaves you with
£300,000 aer you have sold your
home, for example, it might not be
enough for your next property. With a
lifetime mortgage, you might be able
to buy a £400,000 house.
One word of warning though: if a
client has enough cash to buy outright
with the thought that they might
take out a lifetime mortgage once
they are in their new home, it is not
guaranteed that the lender will agree
to lend on the property.
Taking out a small initial lifetime
mortgage to help purchase the
property, on the other hand, means
they have greater certainty of future
funding, with the remaining facility
tucked away for drawdown if needed
in future.
Discussing alternatives
While a lifetime mortgage is a great
solution for some, it’s important to
discuss the alternatives, including
mainstream mortgages.
It’s vital to take a holistic view or the
client might miss out on something
more suitable.
I don’t believe many people have
the bandwidth to be experts on
everything, but having someone
within your firm who can deal with
the other options – or signposting to
other firms that can – is important. ●
July 2025 | The Intermediary
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