Lifetime mortgages make up around 99% of all equity release transactions in the UK, likely as they're more flexible than the alternative equity release product, home reversion. If you’re a homeowner aged fifty-five or above, they allow you to borrow money against the cost of your home that won’t need to be repaid during your lifetime.
Although you are charged interest on your borrowing, there is no obligation to make any repayments throughout the mortgage term, as it is ‘rolled up’ into the total amount you owe and repaid alongside the amount you borrowed, when your home is sold. This is typically once all applicants have passed away or moved into long-term care.
With a lifetime mortgage you’re able to stay in your home for the rest of your life if you want to, however, you also have the option to move elsewhere, so long as the new property meets lender criteria.
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 - which provides you with a one-off tax-free cash lump sum, usually of the total amount you are able to release
Drawdown - which provides you with a smaller initial tax-free cash lump sum, with the remaining value with held in reserve for use at a later date, or paid in small regular payments
Because you are only charged interest on the funds that have been released, the drawdown option can be more economical. However, you should note that money released further down the line will be subject to the interest chargeable at that time, which could be different to the rate paid on your initial lump sum.
You won’t need to repay the loan or the interest in your lifetime if you don’t want to, as the lender will sell your home once all borrowers have either passed away or moved into long term respite to cover this cost.
Although you certainly don’t have to pay any interest on a lifetime mortgage, you will have the option to pay either some or all of it each month, if you wish. This can reduce the total cost of borrowing over time, meaning that there is more likely to be funds remaining from the sale of your home, once the lender’s debt has been cleared.
Those hoping to leave an inheritance may wish to consider making any interest payments that they can afford, to maximise what is left for their beneficiaries once the house has been sold and your debt repaid.
However, some lifetime mortgage products also allow you to ‘ring-fence’ a set amount of money for their beneficiaries, which cannot be taken by the equity release provider when your loan is repaid.
There are also products that allow you to repay some of the loan 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 value per year.
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 the best lifetime mortgage rates 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.
Lifetime mortgage criteria will vary from one lender to the next, however, those that are common across most providers are:
All applicants must be aged fifty-five or over
You will need to own outright, or have a mortgaged property worth a minimum of £70,000
The property must be your main or only residential home, you cannot use a buy-to-let investment property, for example
If you have an outstanding mortgage on your home, this will usually need to be cleared using the lifetime mortgage loan
You will typically need to borrow at least £10,000
Some lenders will also apply additional criteria, which could include, but is not limited to the following:
Restrictions on the type of property you own - for example, some lenders won’t accept listed property, sheltered accommodation or properties above, next to, or opposite commercial premises
Restrictions on the property location - for example, some lenders will only provide lifetime mortgages for those applicants living on UK mainland
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 LTV (loan to value) 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.
The major costs associated with a lifetime mortgage are down to the interest, which is compounded, so it will increase the amount owed more quickly. However, there may 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
Valuation fees: Many lenders offer free valuation fees on this type of product, but they may apply
Solicitor fees: Specialist equity release solicitors usually charge in the region of £650 but can vary
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. For example, our partner Responsible Equity Release can provide you with free expert advice
It’s important to find the most competitive interest rate you can when taking out a lifetime mortgage, as they are fixed for the full duration of the mortgage.
This is also important given that interest is charged differently to how it is on a typical mortgage. With a lifetime mortgage, interest is calculated daily, rather than monthly, and is rolled-up or compounded.
Compounded 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 that you own will increase much more quickly than with regular interest charges.
This also reduces the remaining equity in your home more quickly, so it’s definitely worth trying to service some or all of the interest charges on your lifetime mortgage if you can afford to do so, especially if you hope to leave an inheritance.
The Equity Release Council, has provided the below example to demonstrate how quickly interest can accumulate on a lifetime mortgage when no payments are made. It’s also worth bearing in mind, however, that some of this could be balanced if your property increases in value, as your equity will, therefore, also increase.
|Year||Loan balance||6% Interest charges||Total owed|
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.
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
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.
Kellie Steed, Mortgage Content Writer
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!”