Lifetime Mortgages

Lifetime mortgages can offer the financial flexibility you need to enhance your later years, without the burden of monthly repayments. In this guide, we explore how they work, how to determine if they are the right option for you, and where to seek expert advice.

What is a lifetime mortgage?

Lifetime mortgages account for the vast majority of equity release products, comprising 99% of all equity release deals in the UK. They enable homeowners aged 55 and above to borrow against the equity in their property, with repayment typically deferred until after they pass away.

How do they work?

Interest is applied to lifetime mortgages, and it is usually "rolled up," meaning the interest is added to the loan balance and repaid in one lump sum when the loan is settled. However, many providers now offer the option to make monthly interest payments, which helps reduce the overall amount due at the end.

The loan is usually repaid from the proceeds of selling the home after death. For those wishing to preserve a portion of their property’s value for inheritance, it is possible to ringfence a part of the equity.

Lifetime mortgages also offer flexibility in terms of moving house, as long as the new property meets the lender's requirements. One of the key benefits, compared to home reversion plans, is that you retain full ownership and can stay in your home for life.

Additionally, the no-negative-equity guarantee ensures that if the sale of your home doesn't cover the full loan balance, your family will not be required to pay the difference.

Types available

There are several types of lifetime mortgage options, distinguished by how you choose to receive the loan funds:

• Lump Sum: With a lump sum lifetime mortgage, you receive the entire loan amount as a tax-free payment at the start. This is ideal for those who need a large sum upfront, such as for a significant purchase. However, interest is charged on the full loan amount from day one, increasing the overall cost over time.

• Drawdown: A drawdown lifetime mortgage gives you a smaller lump sum initially, with the remaining loan amount held in reserve. You can then "draw down" funds in regular payments, either monthly or annually. This option is often more cost-efficient, as you only pay interest on the amount you’ve already withdrawn, not the entire loan. However, there may be limits on how much you can draw down at a time, along with potential fees.

• Enhanced Plan: Also known as an impaired lifetime mortgage, this option functions similarly to the lump sum model, where you take the maximum loan amount in one payment. The difference lies in the loan calculation, which is based on your health and life expectancy. Those with severe medical conditions or unhealthy lifestyle factors (e.g., a high BMI) may be eligible to borrow more than under a standard plan.

Eligibility criteria

Each lender has their own criteria for lifetime mortgages, which may vary depending on the type of plan you choose. However, the key eligibility requirements typically include:

• Age: You must be at least 55 years old.
• Property ownership: You need to either own your home outright or have a maximum loan-to-value (LTV) ratio of around 50%, depending on the lender. If you still have an outstanding mortgage, the lifetime mortgage must usually be used to pay it off. The property typically must have a minimum value of around £80,000, and investment properties are generally excluded.
• Other property restrictions: Criteria can vary by lender, but many will not accept sheltered or adapted housing, listed buildings, non-traditional construction homes, or ex-council properties. Some lenders also limit lifetime mortgages to properties located on the UK mainland.
• Minimum loan size: Most lenders have a minimum borrowing amount, often around £10,000, but this can vary from provider to provider.

Equity release products, such as lifetime mortgages, are typically not offered by major banks and building societies. Instead, they are provided by specialist later life lending companies like Aviva, Legal & General, and Canada Life.

Despite this, there is strong competition in the equity release market. With access to thousands of deals, it's advisable to consult an equity release specialist, like ourselves, to ensure you secure the best deal tailored to your specific needs.

Advantages and disadvantages

As with any form of borrowing, equity release comes with both advantages and disadvantages. Here are some key considerations:

Pros

• Access to a substantial loan that doesn't need to be repaid during your lifetime.
• Ability to ring-fence a portion of your property’s value for inheritance purposes.
• No-negative-equity guarantee ensures you won’t repay more than your home’s value at the time of sale.

Cons

• Compound interest accumulates faster than standard mortgage interest, potentially leading to a repayment amount far exceeding what you initially borrowed.
• Remortgaging your home can be more challenging compared to a traditional mortgage, as lenders may assess property value more rigorously.
• Equity release can affect your eligibility for certain means-tested benefits.

Alternatives to consider

There are several alternatives to a lifetime mortgage if you're seeking to borrow money in later life. These include:

• Home reversion: Although less common today, this equity release option involves selling a portion or all of your home to a home reversion provider for a percentage of its market value, typically between 20% and 60%, depending on your age and health. You continue living in your home rent-free.

• Remortgage and downsize: You could consider remortgaging and moving to a more affordable property. Some mortgage lenders don’t impose maximum age limits, making it possible to remortgage even later in life.

• Retirement Interest-Only (RIO) mortgage: Similar to equity release, a RIO mortgage doesn't require you to repay the loan during your lifetime, but you make monthly interest payments. This option can prevent the loan balance from growing, as only the principal is repaid after you pass away or sell the property.

Frequently Asked Questions