Lifetime mortgages explained

As the most popular form of equity release product, a lifetime mortgage lets you use some of the funds you have tied up in your home to boost your cash flow. The loan is secured against your home and you don’t need to make any monthly repayments, which eases your finances later in life.

Peace of mind

With a lifetime mortgage, you retain ownership of your home and can continue living there as normal. The loan is repaid in the event of your death or if you have to go into long-term care. If you have a partner, the repayment isn’t made until the last one of you goes into long-term care or passes away. This ensures you can both live securely in your home without worrying about mortgage repayments for the rest of your lives.

You can choose to receive a lump sum or smaller amounts on a regular basis. You can also increase your loan amount up to an agreed maximum set by the lender. If you suffer from ill health, you may be eligible to receive larger amounts. So that you’re able to release some of your equity while also retaining something to pass on to your beneficiaries, you can ring-fence part of your property’s value.

There are different types of lifetime mortgages to choose from and we’ve detailed the main ones below for you.

Types of lifetime mortgages

Roll-up lifetime mortgage

This type of mortgage lets you release a lump sum from your equity and you don’t make any monthly payments. The interest is rolled up – or compounded – and added to the total of the loan. When you go into a residential care home or die, the loan and rolled-up interest are then repaid. Various factors determine how much you can borrow, such as your age, the property value and the lender’s terms.

The interest rates for most roll-up lifetime mortgage plans are fixed. Whilst you won’t benefit if interest rates drop, this protects you against rate increases in the future. As the interest is compounded (you pay interest on interest), the amount owed adds up very quickly. It’s essential to find a mortgage product that includes a ‘no negative equity guarantee’. This ensures that your estate isn’t liable to repay more than the proceeds of the sale of your property. Even if the amount owed is higher, your beneficiaries are protected from incurring any debt as the remaining debt is written off.

Drawdown lifetime mortgage

With a drawdown lifetime mortgage, you release a smaller amount of equity initially and then receive further amounts over time. You have a pre-agreed facility and can choose to receive cash regularly or just when you need it. This provides you with more flexibility if you think you’ll need more money in due course.

Interest is only charged on the amount you’ve withdrawn rather than the entire amount of equity available. Therefore, although the interest is compounded, the debt builds up more slowly than with a roll-up lifetime mortgage. The interest rate on your initial loan will remain the same but each subsequent withdrawal may have a different rate. This means the rates for future withdrawals can be higher or lower than that for your initial loan amount.

You may be subject to administration charges each time you use this facility so check the terms of the plan with the lender.

Interest serviced lifetime mortgage

This lifetime mortgage, like the other types, lets you receive a lump sum when you take out a loan that’s secured on your home. While the loan is not repaid until you move into long-term care or die, you make regular interest payments. You can choose to pay some or all of the interest each month and this helps to reduce the total amount owed.

The interest rate for this mortgage is fixed so you don’t need to worry about fluctuating amounts over time. Each payment you make reduces the interest that’s added to your initial loan amount and so reduces the final debt owed compared with the other two options.

If you stop making these payments, your interest serviced lifetime mortgage will switch to a roll-up lifetime mortgage. If you borrow as a couple and one of you dies, this is beneficial for the surviving person because they might find it hard to make the monthly payments on their own.

The benefits of a lifetime mortgage

A lifetime mortgage means you can receive a tax-free lump sum later in life. There are no monthly repayments to worry about, you still own your home and you can have a more comfortable retirement to enjoy. You can top up your pension, deal with unexpected expenses or treat yourself. If you want to carry out home improvements, the funds are readily available for you to do so. Should a family member need a helping hand, you have the cash ready to give them.

The drawbacks

There are some negative aspects to consider too. Equity release can affect your entitlement to state benefits, such as Pension Credit and Universal Credit. There are various arrangement fees to pay, such as application fees, legal costs and valuation fees. Ultimately, it reduces your estate’s value and what will be passed on to your beneficiaries. If you wish to repay your lifetime mortgage early, assuming this is agreed by the lender, you will have to pay early repayment charges.

What alternatives are there?

There are lots of factors to consider with lifetime mortgages and it’s advisable to understand the alternative options available to you before making a decision.

A home reversion plan

A home reversion plan is another form of equity release. Unlike a lifetime mortgage, you sell all or part of your home to the provider in exchange for a tax-free lump sum and a lifetime lease. As it isn’t a loan, you don’t pay any interest. You continue to live in the property for the rest of your life, rent-free and without any restrictions. When the property is eventually sold, the provider receives its share of the proceeds.

Downsizing

Equity release can be expensive in the long run and it may be cheaper to downsize. The profit gained from selling your home in Bexley and buying a cheaper one in Bexleyheath, for example, might be enough cash to cover your needs.

Remortgage

Remortgaging may allow you to secure lower monthly repayments. Speak to your lender to see what deals are available and if you can benefit from more competitive rates. If you have enough equity in your property, you might be able to raise some extra cash too.

Retirement interest-only mortgage

As its name suggests, you can take out this type of mortgage during your retirement. With no need to make monthly repayments on the loan, you only repay the interest on the loan each month. The loan is repaid when you sell the property, move into long-term care or die. As you are making monthly interest repayments, you are not eroding your home’s value and have more to pass on to your beneficiaries.

Seek specialist advice

Before making a decision, speak to your mortgage broker for professional guidance. He or she can help ascertain which mortgage product is the right one for you.