Lifetime Mortgages

When most people talk about equity release, they are actually thinking about a Lifetime Mortgage. There could be other ways to meet your needs so you should have a look at our page comparing alternatives to lifetime mortgages.

Get an idea of what you could borrow with our lifetime mortgage calculator

What is a lifetime mortgage?

A lifetime mortgage is essentially the same as a residential mortgage in that the loan is secured on the borrower’s property.

This security allows the lender to offer very low interest rates compared with other types of lending. They have, however, been adapted to make them suitable for borrowing in later life. The main differences are:

The capital borrowed does not have to be paid by a specific date. The mortgage must be redeemed when the last mortgage holder dies or moves into full time residential care. There is always an option to repay up to 10% of the amount originally borrowed every year.

The interest does not have to be paid regularly. Borrowers can pay some or all of the interest as it falls due or it can be added to the mortgage, The borrower decides when and how much, if anything, they want to pay.

Because there are no mandatory payments, you do not have to provide proof of income and expenditure. You are not assessed for what is affordable.

You can arrange a drawdown facility in amount for additional borrowing that can be drawn when it is needed instead of having to go through a whole new application.

Interest rates are fixed for the whole life of the mortgage so there is no need to negotiate a new mortgage every few years.

The interest rate is based on the percentage of the property value that you borrow and the age of the youngest borrower. The lowest interest rates are for older borrowers with the lowest mortgages as a percentage of the property value.

Younger borrowers and/or higher percentage mortgages have higher interest rates. The message is, borrow only what you need and borrow as late as you can.

Who can have a lifetime mortgage?

The minimum age to apply for a lifetime mortgage is 55. However, at that age the maximum amount available is a very small percentage of the property value and interest rates are relatively high. If you are able to defer borrowing until later, better deals will be available.

Some lenders have a maximum age for application of 85 or 90 but there are other options where there is effectively no maximum age.

The property should usually be of traditional construction and in a residential area away from shops or other commercial buildings but if you are uncertain, it is always worth investigating if your home is suitable.

Risks

Money left for your beneficiaries

The outstanding lifetime mortgage balance will be deducted from your estate which will reduce the amount to be shared between your beneficiaries. This amount can be managed if you or your future beneficiaries decide to pay some interest, so it doesn’t roll up. Some people are happy to let the debt increase as it will reduce their inheritance tax bill.

Impact of rolling up the interest

The “no negative equity” guarantee means that the amount to be repaid can never be more than the sale value of the property. Also, although we cannot be sure that the value of the property will increase, or by how much, this would help protect the remaining equity.

Consider a scenario where a house worth £300,000 has a mortgage of £100,000 secured on it at a rate of 3%. Since the value is three times the amount of the mortgage, the house only needs to go up by 1% per year to cover the interest and maintain the equity.

Other people who live with you

One of the triggers for the mortgage to be repaid is the need to go into full time residential care. If you have somebody living with you who is not party to the mortgage, they will have to move out at that point. Although the mortgage would normally be repaid by selling the property, it could be left to beneficiaries if they can pay off the debt, maybe from raising a mortgage of their own.

Moving home

You want to move home within the first five years of the lifetime mortgage there is likely to be an early repayment charge. After that charges will be limited to administration and the cost of things like a valuation on the new property.

If you are downsizing, you might have to repay a part of the loan from the proceeds of the sake to retain the borrowing ratio. If the new property isn’t considered acceptable security, the whole loan must be repaid but this is likely to be without early repayment charges.

Remarriage

Lenders sometimes allow an arrangement to be renegotiated so that your new partner can be added to the loan. Details will depend on their age and the current borrowing and property value.

What can the money be used for?

Equity release is often helpful for people who are asset rich but cash poor. Money raised can be used to repay an existing mortgage or other debts which are not manageable, make essential repairs, or support a limited income. It is an alternative to having to sell up and downsize, which often means a move out of the current area.

A lifetime mortgage can be used to help purchase a new home. For example, you might want to move to be closer to family in another part of the country and need to fund the move or buy a slightly more expensive house. Alternatively, if a couple split up in later life and each wants to buy a property, or one would like to stay in the family home and raise money to release their partner a lifetime mortgage should be available.

Money raised is often used to make gifts to children and grandchildren. This could help the recipients buy their first home or clear student loans. It means that you get to see the outcome of the gift during their lifetime and might also help manage inheritance tax.

Where people already have a good retirement, especially if they have no family beneficiaries, money can be released to pay for extra luxuries. This might be for home improvements or to pay for holidays or a new car, and so on.

You should not consider a mortgage to raise money for a risk investment related to something like the stock market or crypto currency. If the money is lost, you may find it very hard to recover your financial position.

Fees and costs

You will need a solicitor who is familiar with lifetime mortgages to do the legal work. The cost will depend on the amount borrowed and the complexity of the circumstances, but standard cost would be around £650. Customarily, this amount can be added to the mortgage.

There may be some fees related directly to the mortgage. The lender will need to commission a valuation to check the value of the property although this is often free.

There is sometimes an arrangement fee - these can range from £5 to £995, but where they exist, the contract will benefit from a lower interest rate.

The adviser will let you know at the beginning if they are charging a fee. Lifetime mortgages are often more complex than other types of borrowing and the fee from the lender may not cover the work required. You will be told how much is required, when it will need to be paid and whether there are any circumstances where a refund is payable.

If the lifetime mortgage is repaid early there may be a fee called an Early Repayment Charge for the first 8 to 15 years the mortgage. Partial charges ae likely to be added if you exercise a drawdown facility. The early repayment charges do not apply on death or going into full time care, and there may be other circumstances where these early repayment charges are waived.