Lifetime mortgage guide

If you've owned your home for a long time, it's probably risen significantly in value over the years. Value that could be unlocked to make your life that bit easier.

If you're a homeowner aged 55 or over, an equity release lifetime mortgage allows you to convert some of the equity in your home into tax-free cash, while continuing to live in it just as before.

Of course equity release is a big decision and will not be the right choice for everyone. For this reason, lifetime mortgages are only available through qualified equity release advisers whose job it is to ensure you understand all the pros and cons before committing to anything.

To help decide if a lifetime mortgage could be an option for you, we’ve created this straightforward guide.

FAQ: What is a lifetime mortgage?

A lifetime mortgage is a loan secured on your home. Available to UK homeowners aged 55 or over, it is the most popular kind of equity release.

A lifetime mortgage differs from a traditional mortgage in that it doesn't have a set date to repay the loan and you don't need to make monthly repayments. Instead, the loan amount plus all the interest that has built up over the years, is paid off when you die or leave your home to go into long-term care.

You can choose to take the loan as a single lump sum or an initial lump sum with a cash facility to draw down on.

Uses for a lifetime mortgage

The money you raise with a lifetime mortgage can be spent as you wish. Some of the more popular uses for the money you release include:

  • Home improvements
  • Pay off an existing mortgage
  • Increase disposable income or make up a pension shortfall
  • Pay for help or care at home
  • Lifestyle purchases eg. a new car or a holiday
  • A ‘living inheritance’ for loved ones

Lifetime mortgage lending criteria

You could be eligible for a lifetime mortgage if:

  • You own your home.
  • It is worth at least £70,000.
  • The youngest applicant (i.e. you or your partner or co-owner) is at least 55 years old.
  • You have paid off all or most of your existing mortgage. Any outstanding mortgage balance will need to be paid off as a condition of your lifetime mortgage – you can use some of the money you release to do this.
  • Your home is in the UK (not the Channel Islands or the Isle of Man) and is your main residence.

Read more about property ownership criteria for a lifetime mortgage.

FAQ: How do lifetime mortgages work?

  • A lifetime mortgage has no fixed term or end date, hence the name.
  • You take a percentage of the equity in your home as a loan secured against the property, while continuing to live in it.
  • The money you release is tax free.
  • You still own your home and will benefit from any increases in its value over the years.
  • How much you can borrow depends on your age and your home's value. Most lenders stipulate a minimum loan amount, typically around £10,000. You may be able to borrow more if you have a serious health condition.
  • You can choose to take all the cash as a lump sum or hold some in reserve and draw on it as and when you need it. You are only charged interest on the amount you withdraw.
  • You are not required to make any repayments. Instead, compound interest is added to the loan plus all previous interest, so the amount to be repaid grows over time. To lessen the impact of this, many lenders allow you to repay the interest each month or make partial repayments along the way.
  • A lifetime mortgage is repaid when the last surviving mortgage holder dies or moves into long-term care. At this point, your home is usually sold and the loan paid off from the sale proceeds (although it can be paid off by other means). Any money left over will go to your beneficiaries.
  • If the proceeds of the sale are not enough to pay off the lifetime mortgage, your beneficiaries will not have to make up the shortfall. This is an Equity Release Council standard known as the no-negative equity guarantee.
  • If you choose to pay off a lifetime mortgage early, you may have to pay an early repayment charge, which could be considerable.
  • You can choose to ring-fence some of the value of your property as an inheritance for your family.
  • You can move to a new house with a lifetime mortgage, provided the property is acceptable to your lender.

Types of lifetime mortgage

There are five types of lifetime mortgage, although names will vary between lenders:

  1. Roll up lifetime mortgage – you make no monthly repayments and interest is charged on the total amount of the loan, which includes all the interest that has already built up. The amount you originally borrow plus all the rolled-up interest is repaid when you die or move into long term care.
  2. Repayment lifetime mortgage – you make voluntary monthly or ad-hoc payments to reduce the impact of interest roll-up. Some lenders allow you to pay off some of the capital, but there are usually limits to how much you can repay without penalty and how often you can make repayments. The remaining balance is repaid when you die or move into long term care.
  3. Interest only lifetime mortgage - you repay the interest each month so the amount you borrow never goes up. You can stop making repayments if you wish, in which case the interest will be added to the loan. The remaining balance is repaid when you die or move into long term care.
  4. Drawdown lifetime mortgage – this is a lifetime mortgage with a cash reserve. This facility gives you the flexibility to access your cash when you need it rather than taking it all in a lump sum at the start. You only pay interest on the cash you withdraw, not the cash in reserve.  The amount you have withdrawn plus interest is repaid when you die or move into long term care.
  5. Enhanced lifetime mortgage: If you or your partner are living with certain medical conditions, you may be able to release a larger amount from your home and could be eligible for a reduced interest rate.

Paying off a lifetime mortgage

A lifetime mortgage is paid off when the last borrower dies or moves permanently into care. The loan is usually repaid through the sale of your home. However, it can be repaid using alternative funds such as savings, if available.

If you move into long-term care, then either you or your chosen solicitor will be responsible for selling the property. Any money left over after repaying the lifetime mortgage is yours.

If you don’t move into long-term care, when you die your home will be sold by the executor named in your Will. In this case, any money remaining will be part of your estate.

FAQ: Can you pay off a lifetime mortgage early?

If you decide to pay off your lifetime mortgage early, you are likely to incur a penalty known as an Early Repayment Charge, which could be considerable. The exact amount varies between providers.

However, there are some exceptions:

  • Some lifetime mortgages offer downsizing protection after the first five years.  This allows you to move to a smaller home and pay off your lifetime mortgage without having to pay an early repayment charge.
  • On a joint lifetime mortgage, if one borrower dies or moves into long term care, some lenders have a three year window in which the remaining borrower can pay off the mortgage penalty-free

Lifetime mortgage interest rates

The Equity Release Council is the industry body that sets the standards for lifetime mortgages. According to the Council's rules, the interest rate charged must be fixed or, if it is variable, there must be a fixed upper limit (known as a cap) that lasts for the life of the loan.

Interest rates on lifetime mortgages are higher than on a standard mortgage because the lender has less certainty on exactly when they will be repaid.

Currently, lifetime mortgage interest rates are at their lowest ever. For example, Age Partnership has deals from 2.75% AER fixed for life when you use this equity release calculator to find out how much you could release.

With a drawdown lifetime mortgage, each cash withdrawal will be charged at the current interest rate, which might be higher or lower than the rate when you first arranged your plan.

Compare lifetime mortgage interest rates.

Lifetime mortgage costs

The cost of setting up a lifetime mortgage is around £2,000 to £3,000, which usually includes:

  • A fee to the equity release adviser
  • The lender’s arrangement fee
  • Solicitor costs for independent legal advice
  • The valuation of your property

Some lifetime mortgage deals may include lender and valuation fees, alternatively these costs can be added to the loan amount.

Your equity release adviser will ensure you understand all the costs involved and work out what the right solution is for you over the longer term. For example, higher set up costs and a lower interest rate may work out cheaper in the long run.

Lifetime mortgages and inheritance

With a lifetime mortgage, you are using some of the value in your home as a security for the money you borrow. This will reduce the amount you will be leaving your children or grandchildren, but there are ways to safeguard some of their inheritance.

  • Choose inheritance protection: this option lets you secure a proportion of your home’s value for your heirs, by reducing the amount of money you can receive from your lifetime mortgage. You decide how much you want to protect when you apply.
  • Make voluntary repayments: you could choose to repay some or all of the interest on the loan and even some of the capital to reduce the total loan and leave more for your family to inherit.
  • Give a living inheritance: you could give some of the money you release to your children or grandchildren now, rather than waiting. Giving money in this way can also reduce the inheritance tax payable on your estate, although this will depend on HMRC time limits for lifetime gifts.

Hopefully your home will increase in value over the years, as this will also help reduce the impact of loan repayment on your estate.

FAQ: What are the disadvantages of a lifetime mortgage?

It’s important to consider any potential downsides to equity release before committing:

  1. Compound interest – The effect of interest ‘rolling up’ year on year means the amount needing to be repaid can rise very quickly. Making repayments can help reduce the impact.
  2. Early repayment charges - If you want to pay off your lifetime mortgage at any stage, you may have to pay an early repayment charge – although there are exceptions.
  3. Inheritance - A lifetime mortgage will reduce the value of your estate. However, you have the option to protect some of your home's value to leave as an inheritance and could use the money you release to make lifetime gifts to loved ones.
  4. Entitlement to state benefits – A cash injection from a lifetime mortgage could reduce or remove your entitlement to means-tested state benefits including funding for care services.

Alternatives to a lifetime mortgage

Before deciding whether a lifetime mortgage is right for you, you should speak to an independent equity release specialist, talk your plans through with your family and consider any alternative ways to raise the funds you need. For example:

If you have investments, savings, a prospective inheritance, or any other money you could draw on, it might be better to use this rather than borrow against your home.

If you're happy to sell your home and downsize into a smaller property, you could raise extra cash that way. 

If you’re comfortable you could meet the repayments, you may be able to remortgage to free up some equity.

You could sell all, or part of your home at a price below the market value and continue to live in it as a tenant. If this is of interest, ask your equity release adviser about a home reversion plan.

FAQ: Are lifetime mortgages safe?

Yes, lifetime mortgages are safe. Equity release comes under a high level of scrutiny to ensure customers’ interests are protected.

All equity release schemes are regulated by the Financial Conduct Authority (FCA), so lenders, brokers and advisers must be authorised and follow the FCA’s strict codes of conduct. It also means their customers have access to the Financial Ombudsman and the Financial Services Compensation scheme should issues arise.

The Equity Release Council oversees the industry and demands the highest standards of its members who commit to a strict set of principles designed to protect the customer.

Simply Equity Release is regulated by the FCA and a member of the Equity Release Council as is our chosen partner, Age Partnership.

Lifetime mortgage advice

It’s important to speak to a qualified equity release specialist as part of your decision making.

Be aware that some equity release advisers only represent one or a few lenders, so may not be equipped with enough choice to find the right solution for your personal situation.

It is best to speak to an independent adviser or broker who can search the entire equity release market on your behalf.

We’ve chosen to work with Age Partnership because they are independent, compare the whole of the equity release market and offer preferential terms to customers.

Next steps

To discuss your plans and your options, call Age Partnership on 0113 2093531 for a free, no-obligation consultation.

Or try our lifetime mortgage calculator to see how much money you may be able to release from your home.

Try the lifetime mortgage calculator

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