Lifetime mortgages

A lifetime mortgage is a type of equity release arrangement. Homeowners borrow money secured against their home, which usually only has to be repaid when they move into long-term care or die.

Lifetime mortgages allow homeowners to free up equity, providing them with a tax-free cash sum that they can spend however they want – without having to downsize or move house.

You don't have to make any monthly payments on a lifetime mortgage, although some people choose to pay off the interest each month. 

If you don’t pay the interest monthly, it’s “rolled up”. This means that interest is charged daily on a compound basis – each day interest is calculated based both on the original amount borrowed and the interest owed from previous days.

The size of your debt grows rapidly as a result. However, most lifetime mortgages include a “no negative equity” clause, which means the amount you owe can never be greater than the value of your home. 

When you die or move into care, the sale of your house will therefore always cover the total owed.

A lifetime mortgage is a way of releasing some of the equity in your home by taking out a loan that doesn’t need to be repaid until you die or the house is sold – allowing you to release and spend some of the cash tied up in your property.

When you die or go into care, the home is then usually sold to raise the cash to pay off the debt and the accrued interest.

The percentage of the property you can borrow against depends on your age and the value of your home, but it will typically be between 25% and 60% (with older homeowners often offered larger loans). 

Depending on the type of lifetime mortgage you choose, there are often no monthly repayments to make, although you can choose to pay off interest – and sometimes even some of the capital – each month to lower overall repayment costs.

And while most deals charge interest at a fixed rate, you can occasionally find variable-rate deals. 

Interest rates for lifetime mortgages can be high, though; at the time of writing, most deals charge between 4% and 7%. The interest is also compounded, which means it grows quickly over time. 

So if you decide to go down the equity release route, it’s crucial to shop around and find the best lifetime mortgage interest rates you can.

Many lenders offer a “no negative equity guarantee” guarantee which means the total debt cannot exceed the value of the house. While you live in the property, you will still be the owner and responsible for maintaining it.

Lenders will only let you take out a lifetime mortgage if you meet their eligibility criteria.

Usually, this means you must:

• Be over 55 years old

• Have little or no mortgage left to pay

• Own a property in good condition, that is also your main residence

Some lenders also require your property to be worth a certain amount.

A lifetime mortgage could, for example, be an option if you are retired and need some extra money to supplement your pension.

Before deciding, weigh up the pros and cons of a lifetime mortgage and make sure you're comfortable with the risks. Talking to a financial adviser will also help you to make the right decision.

If you take out a lifetime mortgage, the loan is repaid when you die or move into care, reducing the amount you can leave to your family or other beneficiaries. Some lenders allow you to ring-fence a portion of your home’s value, which helps control this risk.

Applying for a lifetime mortgage can also result in you losing means-tested benefits, including pension credit, council tax support and the Cold Weather Payment. So do your sums carefully, to make sure you’ll be better off.

Before applying for a lifetime mortgage, it’s also worth checking that your chosen lender is approved by the Equity Release Council (ERC). This will ensure that your lifetime mortgage has a no-negative equity guarantee, which means you will never owe more than your home is worth. 

Choosing a lender approved by the ERC will also ensure you have the right to live in your property for life and the freedom to move to another property without paying a penalty. If you choose a variable-rate product, there will be a cap on how high your interest rate can go too.

A home reversion scheme, with which you sell all or part of your home for a lump sum or regular income, is another way to release equity from your home while continuing to live there rent-free.

You can also generate extra retirement income by:

• Downsizing your home

• Taking out a secured loan against your property