Lifetime Mortgages

What is a lifetime mortgage?

A lifetime mortgage is the most popular type of equity release product. It allows you to access the equity that has built up in your home so that you can either receive a tax-free lump sum or smaller sums at regular intervals. The loan is secured against your home and you retain ownership of your property. This is different to a home reversion plan – another equity release product – which affects your home ownership.

Unlike a standard residential mortgage, you don’t need to make monthly repayments and there’s no fixed term for a lifetime mortgage. Instead, the loan isn’t repaid until you either move into long-term care or die, at which point your home is usually sold to repay the loan. You can choose to ring-fence some of your property’s value to ensure that this amount is left as an inheritance for your loved ones.

As you don’t have to make any mortgage repayments each month, you can enjoy more flexibility with your cash flow. Interest is charged on the loan each month but this is usually rolled up, which means that it’s added to the loan amount and repaid at the same time as the loan. If you prefer, you can pay some of the interest rather than letting it build up. This would reduce the overall amount of interest charged and lower the total to be repaid at the end.

Why might you want a lifetime mortgage?

If you have equity tied up in your home, there are lots of reasons why you might want to take advantage of a lifetime mortgage. You may be concerned about not having enough to live on during your retirement, for example. Releasing the equity will give you a financial cushion to enjoy a more comfortable retirement. Or you may have an existing mortgage and don’t want the burden of its repayment hanging over your head. With a lifetime mortgage, you can pay off your existing mortgage and use any remaining funds as you wish.

With this type of mortgage, you aren’t restricted on what you can use the equity for. So you can splash out on holidays or get those home improvements done that you’ve been planning. You may want to use it to help out a family member financially. For example, you can help your child get onto the property ladder, contribute towards your grandchild’s tuition fees or help them to pay for their wedding. Whatever your needs, you can spend the money released however you want to.

How does a lifetime mortgage work?

If you have equity in your home and are aged 55 or over, you can benefit from a lifetime mortgage. Generally, you can borrow up to 60% of your home’s value although this depends on other criteria, such as your age and health. You don’t need to own your home outright and the ownership of your home won’t be affected by taking out this type of mortgage.

You don’t make any monthly repayments and can continue living in your home until you either move into long-term care or die. Your property will usually be sold at that point to repay the loan. If you take out a joint lifetime mortgage, your property won’t be sold to repay the loan until the last one of you either goes into long-term care or dies.

With this type of equity release product, you have complete flexibility as to how you spend the funds released from your home. If you receive means-tested benefits, you should be aware that these may be affected if you take out a lifetime mortgage.

The interest charged on a lifetime mortgage

As with any mortgage, interest is charged on the loan amount. However, the interest for a lifetime mortgage is usually compounded rather than paid monthly, although the option to pay the interest is available if you prefer. The compounded interest makes a lifetime mortgage a more expensive option than the alternatives, such as a retirement interest-only mortgage.

How do you receive the funds?

You can either receive all of the funds in a lump sum or an initial smaller amount that’s followed by smaller sums as you need them, which are called drawdowns. If you take the released equity as a lump sum, the interest will be charged at a fixed rate on the full amount. If you opt to receive smaller amounts, the interest will only be charged on the amounts you’ve taken. The latter option reduces the amount of compound interest charged, lowering the overall balance that has to be repaid.

The types of lifetime mortgages

There are two types of lifetime mortgages to choose from — an interest roll-up mortgage or an interest-paying mortgage. These affect the total amount payable at the end, as detailed below. Our mortgage brokers will ensure that you’re fully aware of the differences between them before you choose one.

Interest roll-up mortgage

Whether you take a lump sum or receive smaller amounts at regular intervals, the interest you’re charged is added to the loan to be repaid at the end with this type of lifetime mortgage. As you don’t make any monthly repayments, the amount you owe grows very quickly. This is because each time the interest is calculated, it includes the original loan amount as well as the interest that has already been accrued. Therefore, having rolled-up interest, also called compound interest, means that the interest charged gets higher every year. Whilst you don’t need to make any monthly payments and will, therefore, benefit from a better cash flow, the compound interest makes your mortgage much more expensive in the long run. The increasing debt will gradually reduce any inheritance you wish to leave to your loved ones.

Interest-paying mortgage

With this type of lifetime mortgage, you can either make full interest payments at regular intervals, usually each month, or partial interest payments. If you choose to pay the interest in full every month, only the loan amount will need to be repaid at the end. If you pay some of the interest but not all of it, the unpaid interest will be added to the loan amount to be repaid at the same time. Both of these options mean that less will have to be repaid at the end than if you choose an interest roll-up mortgage. They also reduce the overall cost of your lifetime mortgage, with full interest payments being the most cost-effective option.

How do you repay a lifetime mortgage?

With this type of mortgage, you don’t need to worry about making monthly repayments or having a fixed repayment date. Once you’ve either had to move into long-term care or you pass away, your property will usually be sold and the loan repaid from the proceeds. When you have taken out a lifetime mortgage with someone else, this won’t happen until the last person moves into long-term care or dies.

Your estate can be used to repay the loan rather than selling the property if your beneficiaries prefer to do that. On the other hand, if the property is sold and the proceeds aren’t adequate enough to repay the loan, your beneficiaries may have to pay the balance from your estate. To ensure that this doesn’t happen, you should ensure that your lifetime mortgage comes with a ‘no negative equity guarantee’. This stipulates that you won’t have to repay more than the value of your home, even if the overall amount owed is higher than your property’s value.

Is early repayment possible?

You can usually make partial repayments without incurring an early repayment charge (ERC). The maximum allowance for this tends to be 10% annually of the total amount borrowed, not including any accrued interest. If you’re in a financial position to do this, making annual repayments to reduce the outstanding loan will reduce the interest that’s added to it over the years.

If you repay more than the annual allowance, including repaying your mortgage in full, you’ll be penalised with an ERC. This can be very expensive so you’ll need to weigh up the cost of doing so first. Lifetime mortgage products vary but an ERC is normally applied on a sliding scale. For example, it may start at 10% and gradually reduce by 1% each year. Our mortgage brokers can find out whether an ERC will apply if you wish to repay your lifetime mortgage early. They can then help you calculate the interest to be charged compared with the ERC so that you can make the best decision financially.

Eligibility criteria for a lifetime mortgage

Lenders’ eligibility criteria vary for lifetime mortgages but, in general, the following apply:

• You need to be aged 55 or over
• The lifetime mortgage must be for your residence
• You must own your home

Some lenders have a maximum age requirement at the time of application, such as 85. If you’re applying for a joint lifetime mortgage, the age of the youngest applicant will be taken into account. The value of your home may also be considered, with some lenders specifying a minimum value, such as £70,000. Some lenders also have a minimum loan requirement, such as £10,000.

How much can you borrow with a lifetime mortgage?

The amount you can borrow varies depending on different factors, including your age, health, lifestyle and the value of your home. The older you are, the more you can usually borrow. Likewise, the higher your home’s value, the more you can borrow. Typically, lenders agree to a 60% loan-to-value (LTV) ratio. Lifetime mortgage providers vary with their criteria but, generally, they allow an equity release of between £10,000 and £100,000. You can take this amount as a lump sum or as smaller amounts over time if you prefer.

The costs involved with a lifetime mortgage

If you choose to have the released equity as a lump sum, interest will be charged on it at a fixed rate. If you prefer to receive smaller sums, interest will be charged on those sums as you take them and the lender’s rate at the time will apply. It’s important to remember that the interest is usually rolled up for a lifetime mortgage. It’s charged on the loan amount as well as the interest that has already accrued. This means that the overall amount owed increases quickly. As well as the interest for your lifetime mortgage, there are other costs to consider. These can include:

• The lender’s arrangement fee
• A valuation fee
• A survey fee
• The legal costs

An early repayment charge may apply if you repay some or all of your lifetime mortgage early.

Our mortgage brokers will compare the lifetime mortgage plans and advise you on the fees charged for each one. That way, you can make an informed decision before proceeding.

The advantages of a lifetime mortgage

There are numerous benefits offered by lifetime mortgages. These include:

• You can access the equity that’s tied up in your home without having to move.
• The ownership of your home is not affected like it is with a home reversion plan, which is another equity release product.
• You can choose to receive a tax-free lump sum or smaller amounts as you need them.
• If you opt to take smaller amounts, interest won’t be charged until you use them.
• There are no restrictions on how you spend the money that’s released.
• You don’t have to make any monthly repayments.
• The loan isn’t repaid until you move into long-term care or die.
• You can make partial loan repayments to reduce the outstanding debt if you’re in a position to do so, without being penalised with an early repayment charge.
• If you want to, you can pay some or all of the interest each month.
• You can still move home, provided that the new property meets the lender’s requirements.
• If you want to move and the new property doesn’t meet the lender’s criteria but you’ve had your lifetime mortgage for a specific number of years, they may allow you to move and repay your lifetime mortgage without incurring an early repayment charge.
• Releasing the equity in your home can help with inheritance tax planning.
• You can ring-fence some of your property’s value to leave as an inheritance for your loved ones.
• A no negative equity guarantee ensures that your estate won’t have to pay back more than your home’s value when it’s sold, even if the outstanding debt is higher than this.

The disadvantages of a lifetime mortgage

There are also various drawbacks to consider for lifetime mortgages. These include:

• Releasing the equity from your home reduces the amount that you can leave to your loved ones.
• The interest charged when taking the cash as smaller payments will vary depending on the rate at that time.
• The compound interest can make your overall debt increase very quickly, making a lifetime mortgage more expensive than alternative options for borrowing later in life.
• Having a lifetime mortgage may affect any means-tested benefits that you’re entitled to.
• Your property is usually sold to repay the loan when you’ve either gone into long-term care or passed away, which means that your beneficiaries won’t be able to inherit it.
• The accumulation of interest on top of the loan may lead to a higher amount being owed than the value of your home, resulting in negative equity. This means that your beneficiaries will be responsible for paying the balance of the debt if your lifetime mortgage doesn’t come with a no negative equity guarantee.
• If you repay a significant amount or all of your loan early, you may be penalised with an early repayment charge.

If you want to move home but the new property doesn’t meet the lender’s requirements, you won’t be able to transfer your lifetime mortgage. Instead, it will have to be repaid in full and you’ll more than likely have to pay an early repayment charge.