A lifetime mortgage is a type of equity release. 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, but some people may choose to pay off the interest each month.
If you don’t pay the interest, it is “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.
This means the size of your debt snowballs and grows rapidly. 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 house can be sold and the interest repaid.
A lifetime mortgage is a way of releasing some of the equity in your home. They work by securing a loan against your home, which doesn’t need to be repaid until you die or the house is sold.
They allow you to release cash tied up in property and spend it now. Typically, it won’t be repaid until you die or go into care. At that point, the home is usually sold and the cash raised used to pay off the debt and the accrued interest.
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 each month to keep repayment costs lower.
The vast majority of mortgage lenders offer fixed-rate lifetime mortgages, but you can occasionally find variable rate deals. Interest rates can be high – and it’s not unusual to pay between 3-5%. 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.
The interest is compounded, which means it grows quickly over time. Many lenders guarantee that the total debt cannot exceed the value of the house, protecting you and your loved ones from negative equity. This is often called a “no negative equity guarantee”.
Some borrowers choose to pay back the interest each month, to prevent it rolling up and the debt growing. You can even find deals where you repay some of the capital too.
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%. Usually, the older you are, the more you'll be able to borrow.
If you take out a lifetime mortgage, you will still own your home and be responsible for maintaining it.
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Lenders will only let you take out a lifetime mortgage if you meet their eligibility criteria.
Usually, that means you need to:
Be over 55 years old
Have little or no outstanding mortgage left to pay
Own a property in good condition - this must also be your main residence
Some lenders will also say your property needs to be worth a certain amount
A lifetime mortgage could be an option worth considering if you are retired and need some extra money to supplement your pension in later life.
Whether it’s the right choice for you will depend on your financial circumstances, your age and how much equity you have in your home. Before deciding, it’s vital that you weigh up the pros and cons of a lifetime mortgage and make sure you are comfortable with the risks. It’s also well worth talking to a financial adviser to be sure you’re making the right decision.
Here, you receive a cash sum with no monthly payments required. The interest is compounded over the loan term, and both the total amount of interest and the cash sum are repaid when you go into care, die or the house is sold.
With this type of lifetime mortgage, you receive a lump sum, but rather than the interest rolling up, you pay some or all of it off each month. Some lenders will also let you repay some of the capital each month. The amount outstanding is repaid when you go into care, die or the house is sold. This is sometimes known as a flexible lifetime mortgage.
Most lifetime mortgages release a lump sum of capital when you take out the loan. The amount you can borrow is dependent on the value of your house and how old you are. When the house is sold you pay back the whole lump sum as well as any interest you owe. The total amount owed will depend on whether you chose interest roll-up or paying.
This allows you to take a smaller initial loan and then lets you release (drawdown) money over time. This means that you can access cash when you need it and only pay interest on the amount taken. The overall cost can be considerably lower as a result. It can either be interest-paying or interest roll-up.
Some providers offer enhanced lifetime mortgages to those with lower-than-average life expectancies - for example, if you have a certain medical condition. These let you unlock more cash from your home, and often at better rates too.
Just like the mortgages you get when buying a home, lifetime mortgages can come with all sorts of charges that you need to pay. Not all products will have the same fees so make sure you factor this in when choosing a provider.
An arrangement or application fee: Just like with standard mortgages some products carry no fees, while others cost hundreds of pounds, depending on the product.
Solicitors’ fees: Equity-release solicitor fees are typically £650, but rates can vary substantially. Shop around and look for recommendations before appointing your lawyer.
A valuation fee: This is the cost of having the home valued so that lenders know how much it is worth and what they can loan you. The fee is charged when you apply and is non-refundable.
A completion fee: This covers the cost of setting up the mortgage and may include the lender’s legal costs and transfer fees.
Adviser fees: These vary significantly, with some brokers charging thousands of pounds. However, taking advice can help make sure equity release is right for you. Shop around to choose the right adviser.
Total costs can add up to a few thousand pounds, so make sure you budget for them. Remember that interest rates can also be higher than on a conventional mortgage.
If you take out a lifetime mortgage, the loan is repaid when you die or move into care. This means that your family or other beneficiaries will inherit less as you will owe at least some of the value of your property. 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. 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 that you will never owe more than your home’s value.
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. It also puts a cap on how high interest rates can go if you choose a variable rate product.
If you want to release equity from your home, you could also consider a home reversion scheme. These allow you to sell all or part of your home for a lump sum or regular income. You can continue to live in your house, rent-free.
Alternatively, if you'd prefer not to use equity release, you could generate extra retirement income by:
Downsizing your home
Taking out a secured loan against your property
Taking out a personal loan (if you only need to borrow a smaller sum)
If you're looking to boost your disposable cash or are concerned about meeting the rising cost of living, a lifetime mortgage might be an option for you. However, you should carefully consider whether the positives outweigh the risks. ”Nisha Vaidya, Mortgage Editor
The percentage of the property you can borrow against usually depends on your age, your property's value, and the lender you use. Typically, lenders let you borrow between 25% and 60%.
Most lifetime mortgage providers should have a “no negative equity guarantee” (Equity Release Council standard), which means you will not be asked to pay back more than your home's sale value. But always check this is the case before applying.
There are two different types of equity release schemes. The first is a lifetime mortgage, and the second is a home reversion scheme.
This depends on the lender and the terms of the deal. Some will charge you extra fees if you pay the mortgage off early, so check carefully to see what the rules are before you sign up.
A lifetime mortgage is one of the two main types of equity release. The other is a home reversion scheme. Both allow you to access the equity in your home without selling up or remortgaging. Make sure you understand all the rules and risks before you apply.
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