Lifetime mortgages

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What is a lifetime mortgage?

Lifetime mortgages make up around 99% of all equity release transactions in the UK. If you’re a homeowner aged fifty-five or above, they allow you to borrow money against the value of your home, and the loan won’t need to be repaid during your lifetime.

You're charged interest on your borrowing, but there is no obligation to make any repayments throughout mortgage term, as it can be ‘rolled up’ and added to the total amount you owe.

The loan is repaid when your home is sold, which is once all applicants have passed away or moved into long-term care. With a lifetime mortgage you can stay in your home for the rest of your life if you want to, but can also move, if the new property meets lender criteria.

How do lifetime mortgages work?

You can take out a lifetime mortgage to raise money for whatever purpose you need, and choose to release the money in one of two ways:

Lump sum - provides you with a one-off tax-free cash lump sum, usually of the total amount you're able to release

Drawdown - you take a smaller initial tax-free cash lump sum, with the remainder held in reserve for later use, or paid to you as regular payments

Because you're only charged interest on released funds, the drawdown option can be more economical. However, money released later will be subject to the interest chargeable at that time, which could be different.

You won’t need to repay the loan or any interest in your lifetime if you don’t want to. The lender will sell your home once all borrowers have passed away or moved into long term respite to recover the loan.

Lifetime mortgage rates

The best lifetime mortgage rates are usually available to older applicants with high value properties. However, it's important to seek out the most competitive interest rate no matter what your circumstances, as you'll be charged a fixed interest rate for the full duration of the mortgage.

Interest is charged differently on a lifetime mortgage, as it's calculated daily, rather than monthly, and is rolled-up or compounded.

What is compound interest?

Compound interest is where interest is charged on top of the interest that you already owe, as well as on the loan amount. This means the total amount you owe will increase much more quickly than on a regular mortgage.

The larger your balance, the lower the remaining equity in your home, so it’s worth trying to pay at least some of the interest during your lifetime mortgage if you can afford to do so - especially if you hope to leave an inheritance.

Should I pay the interest?

Although you certainly don’t have to pay any interest on a lifetime mortgage, you'll have the option to pay either some or all of it each month.

For those hoping to leave an inheritance, making interest payments will maximise what's left for beneficiaries once the house has been sold and your debt repaid from the profits.

Some lifetime mortgage products also allow you to ‘ring-fence’ a set amount of money for beneficiaries - this cannot be taken by the equity release provider when your home is sold

Some products allow you to repay some capital as well as the interest, if you want to further protect your beneficiaries inheritance. Loan repayments are typically capped at 10% of the total balance per year.

Am I eligible for a lifetime mortgage?

Lifetime mortgage criteria varies from one lender to the next, but usually include:

All applicants must be fifty-five or over
You need to own outright, or have a mortgaged property worth £70,000+
The property must be your main or only residential home, you cannot use a buy-to-let investment property, for example
Any outstanding mortgage on your home will usually need to be cleared using the lifetime mortgage
You'll typically need to borrow at least £10,000

Some lenders may also apply additional criteria, such as:

Restrictions on the type of property - listed buildings, sheltered accommodation or properties above, next to, or opposite commercial premises are not always accepted
Restrictions on the property location - some lenders only allow property on UK mainland
You may not be able to get a lifetime mortgage if you used a home ownership scheme, such as help to buy, right to buy or shared ownership to purchase your home

Lifetime mortgage costs explained

The major cost associated with a lifetime mortgage is the interest, which is compounded, so your balance will continue to grow quickly if you don't pay any. However, there can also be set up fees similar to traditional mortgage fees, for example:

Arrangement fees: Also known as an application fee or product fee, which is usually charged at a set rate or a percentage of your loan size
Solicitor fees: Specialist equity release solicitors usually charge in the region of £650 but can vary
Valuation fees: Many lenders offer free valuation fees on this type of product, but they may apply
Advice fees: Some lifetime mortgage advisers charge for their advice, typically around 1-3% of the loan value, however, it is possible to obtain free advice. Our partner Responsible Equity Release can provide you with free expert advice

Advantages and disadvantages of lifetime mortgages

Access to a tax-free cash sum that can be taken all at once or in stages, which can be used for any purpose, for example, you might want to build an extension, or help your children or grandchildren to purchase their first home
You can keep your home for the rest of your life, but also have the option to move*
You won’t have to make any repayments unless you want to
You can repay some or all of the interest to reduce the cost of your final repayment, leaving more for your beneficiaries*
Removes the need to downsize your home in later life
Some products have an inheritance protection option*
No negative equity guarantee*
Some lenders offer downsizing protection - so if you move to a smaller property, you can repay your loan without early repayment charges or interest

* When using an Equity Release Council approved provider

Interest can build up quickly if you choose not to repay, as it is compounded
There may be cheaper ways to borrow money, depending on the amount needed
It will reduce the value of your estate and therefore, what can be passed on through inheritance
Early Repayment Charges (ERCS) may apply if you repay the loan early
Means-tested state benefit entitlement can be affected by taking out a lifetime mortgage
Higher interest rates than traditional mortgages
If you need to repay your existing mortgage as a part of the equity release process, ERCs could apply to that mortgage

Should I take out a lifetime mortgage?

Equity release can be life changing for some people, however, whether they are suited for you as an individual will depend on your circumstances.

There are many advantages to this form of mortgage, however, it’s not always the cheapest way to borrow money, so it’s important to look at all of the options available to you before deciding that this is the right path for you.

Be sure to ask yourself how important it is for you to leave an inheritance, whether any means-tested benefits you receive would be affected and whether you might need some of the equity from your home at a later date, as a part of the decision making process.

A lifetime mortgage can provide you with more financial freedom in your later years, however, it's important to understand that it will reduce the value of your estate and may affect means-tested benefits. Always seek advice from an Equity Release Council registered adviser.”

Kellie Steed, Mortgage Content Writer

Lifetime mortgages FAQs

The home reversion plan is another form of equity release. It involves selling your home at a below-market rate to a home reversion provider, who will then allow you to remain in the property until you die or go into long term care.

With a home reversion plan, you are only likely to be offered 20-60% of the current value of your home, you will not be able to move to a new property if you want to, and you will not be able to leave an inheritance from the value of your home, as the lender will own it outright.

Depending on why you are choosing to release equity, there could also be a number of non-equity release options that would help you to raise the funds needed, if equity release is not for you.

For example:

Downsize to a more affordable property
Remortgage your home – many lenders can help older and retired borrowers
Take out a retirement interest-only mortgage (RIO) – Similar to a lifetime mortgage, but interest must be repaid each month
Taking in a lodger – you can earn up to £7,500 a year tax-free from letting a room
Maximise your existing savings and investments with the help of a financial adviser

Negative equity is where you owe more than the current value of your home. So long as your equity release provider is a member of the Equity Release Council, you will be covered by their ‘no negative equity guarantee’.

This means that you (or your estate) will never owe money more than the value of your home when the loan is repaid, as the most any lender could take is 100% of the proceeds of the sale of your home.

The Equity Release Council (ERC) is a voluntary trade body which oversees the equity release sector. They are fully regulated by the Financial Conduct Authority (FCA) and all lenders that have membership to the council have a responsibility to uphold values and standards of conduct through customer safeguarding.

If you’re considering a lifetime mortgage, it’s vital to ensure that you opt for an Equity Release Council approved lender, as this will offer you the following legal and financial protections:

All interest rates are fixed for life (or capped if you choose a variable rate), no matter when the money is accessed
Retained ownership of your home and a right to stay in it for your lifetime
The right to transfer your lifetime mortgage to another property, so long as the property meets lender criteria
A no-negative-equity-guarantee, meaning you (or your estate) will never repay more than the value of your home
The right to make voluntary contributions towards repaying the interest

Taking out any form of equity release carries potential risks, so it’s incredibly important to seek advice from a Equity Release Council approved adviser before you make any permanent decisions.

They will also be able to help you to compare deals from across the market, so that you don’t miss out on products offered by lenders that are perhaps less accessible to the general public.

It’s important to look at all of the product benefits alongside the interest rates, to see if they align with your needs. For example, securing a ring-fenced figure for your beneficiaries could be an important element of the plan for some borrowers.

This will depend on a few factors, including how much you want to borrow, you are certainly not obliged to take the full amount available to you, your age and health status, and the value of your property.

Lenders will typically offer a higher loan to value (LTV) to older borrowers or those with serious or terminal illnesses. For example, a healthy fifty-five year old is likely to be offered a smaller loan than an eighty year old with cancer.

There are online equity release calculators that may give you an idea of how much you could borrow, but it’s worth bearing in mind that these are not set up to take into account personal circumstances. It’s usually best to confirm your findings with an expert adviser.

As mentioned above, there are potential disadvantages and risks involved with lifetime mortgages, however, it will depend on your circumstances whether they apply to you and how much you are affected.

So long as you seek advice from a broker or advisor who is registered with the Equity Release Council, and you fully understand the potential risks involved, however, you will be in a strong position to make the right decision for you.

Last updated: 05 September 2023

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