Updated 03 September 2020
A lifetime mortgage is the most commonly used form of equity release. It is a way to borrow money against the value of your home, with a loan that will be repaid only when the property is sold. In other words, it’s a way to turn some of the stored value in your home into money that you can spend now.
Read on to find out how a lifetime mortgage works, and the pros and cons of using one.
A lifetime mortgage is a popular way of unlocking your home’s value without having to sell or move out. Like a normal mortgage, it involves taking out a loan at an agreed rate of interest and using your property as security. But whereas most mortgages are paid back in regular instalments, a lifetime mortgage is typically repaid when the house is sold. A sale will usually happen only after you die or have move into long-term care.
A lifetime mortgage is a popular form of equity release as it leaves you in full legal ownership of your home – unlike the other kind, a home reversion plan. However, home reversion still entitles you to live in the property rent-free for as long as you like.
You’ll generally be allowed to borrow between 18% and 50% of your property’s current value. Here’s an example:
Emma owns her property outright and has no existing mortgage. She’s offered a loan of £50,000 with an interest rate fixed at 5%. She takes the £50,000 as a lump sum and chooses not to pay off the interest as she goes (more on this option later). After 10 years, Emma moves into a care home and her house is sold. The loan is now repaid from the proceeds of the sale, and is the original £50,000 loan plus the 5% interest compounded over the 10 years, which is £31,445– making a grand total of £81,445.
Now let’s suppose Emma remains in her home for 20 years rather than 10. The interest would compound over the full 20 years, so would amount to £82,665. This makes a grand total of £132,665 to be repaid. Depending on the sale price of her home, this might not leave very much for her family to inherit.
You’ll have two options as to how you receive your money from the lifetime mortgage. It can be paid all in one go, or as a smaller initial amount with the option to receive additional payments (drawdowns) later on. Choosing a single cash lump sum may suit your requirements, but you’ll be paying interest on the full loan amount from day one. This approach may also affect how much tax you pay and any means-tested benefits you receive.
There are two main types of lifetime mortgage. Your choice can have a huge impact on how much you end up repaying in the end, so it’s important to understand the difference at the outset.
In the example given above, Emma is using an interest roll-up mortgage. With this kind of lifetime mortgage, you don’t pay off the interest as you go, so the interest continues to mount up, and interest is charged on the interest itself – in the process known as compounding. This is what makes interest roll-up mortgages more expensive in the long run.
With this type of lifetime mortgage it’s theoretically possible to end up owing more than your property is worth. However, most providers offer a ‘no-negative-equity guarantee’, which means your debt will never be more than the property’s final selling price. However, this still means that there could be nothing left for your family to inherit. Furthermore, you would have effectively ‘sold’ your house for the sum you received initially – which you may consider to be very poor value for money.
You can cut the cost of a lifetime mortgage by choosing an interest-paying mortgage. Instead of letting interest mount up, you pay it off at regular intervals (usually monthly). Though this may seem like an additional expense, it can mean that your loan is far better value for money in the long term.
You’ll now be paying interest only on the original loan amount, rather than on the interest as well. This prevents the ‘snowball effect’ of compound interest, ensures the final repayment sum is much smaller, and means you repay less money overall.
Some providers will also allow you to pay off a certain percentage of the loan each year without incurring a penalty (early repayment charge). This reduces the overall loan amount, so again you’ll end up paying less in the long term.
A number of factors will affect your eligibility for a lifetime mortgage. Typically, you’ll need to be at least 55 years old, although in some cases it’s 60. If you’re submitting a joint application, the age of the youngest person will be used. The older you are the more you’re likely to be able to borrow, and having existing health conditions might also qualify you for a larger loan.
You must own your home and it will also need to be your main residence. If there’s an outstanding mortgage on the property, a portion of the agreed loan will be used to pay this off first.
Some providers will require your home to be worth a certain amount, usually around £70,000 or more. They may also specify a minimum loan amount, often at least £10,000.
You can incur various costs when setting up a lifetime mortgage. Specific fees vary between providers, as does the amount you can expect to pay. You might be able to benefit from special deals and cashback offers if competition for business is strong. In general, aim to budget for between £1,000 and £3,000.
Here are examples of typical costs:
Whether a lifetime mortgage is right for you will depend on your age, your health and your financial situation. You will end up repaying more than you borrowed, and with an interest roll-up mortgage this amount could be far bigger. Your beneficiaries will therefore inherit less when you die.
Receiving a lump sum in cash could also affect any means-tested support you’re currently entitled to. For a full rundown of the potential drawbacks, take a closer look at our guide to the pros and cons of equity release.
To find the best deal on an equity release plan such as a lifetime mortgage, you need to fully consider your requirements and your current finances, as well as the range of products available. The simplest way to do this is to get help from an independent mortgage broker. Their fee will be small compared to the amount of money they could potentially save you overall.
If you have a spouse, or a partner who is also on the mortgage, then they can continue living in the property for as long as they wish after your death. They will also now be solely responsible for the mortgage and any repayments due.
When your spouse or partner dies or moves into a care home (or if you have no surviving spouse or partner), then your property will be sold, and the funds will be used to pay off the outstanding loan amount and any interest still owed. Any money that’s left over from the sale can be passed on to your beneficiaries.
If you want to move house in the future, you can transfer your lifetime mortgage as long as you’re moving to a ‘suitable alternative property’. This applies to all lifetime mortgages approved by the Equity Release Council. Note that properties in retirement complexes aren’t usually regarded as suitable, as there are often restrictions that prevent them from being sold on the open market.
A lifetime mortgage is a loan secured on your main residence, so you wouldn’t be able to let out the whole property (as it is not a buy-to-let mortgage). However, you may be able to let out individual rooms within the property, provided you have your mortgage lender’s written permission. Don’t make any plans to do this unless you first have permission from your lender.
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