Lifetime mortgages are an excellent way for homeowners over the age of 55 to release tax-free cash from the value built up in their property, without having to move home or make repayments.
Lifetime mortgages are the most common form of equity release loan and are well regulated by the FCA, giving homeowners the confidence that they can borrow against the value in their home without risks such as negative equity or losing their home. This is why many later-life borrowers are now using lifetime mortgages to free up tax-free money to help fund retirement, clear other debts and support younger family members.
To learn more about lifetime mortgages read our FAQs, or connect with one of the specialist equity release Mortgage Advisors below to discuss how releasing equity could work for you.
What is a Lifetime Mortgage?
A lifetime mortgage is similar to a standard mortgage in that you borrow money from a lender using your house as the security. However with a lifetime mortgage there’s one key difference; you don’t make monthly repayments to pay off the mortgage. Instead, the interest you owe on the loan is accrued and not due for repayment until the last borrower either dies or is moved into permanent care.
This provides a fantastic way for over 55’s to unlock the value that has been built up in their homes, without the financial strain of making repayments or the disruption of having to sell their home in order to meet later life expenses. Many lenders also offer a ‘best of both worlds’ solution; where borrowers are able to make flexible repayments against the loan to prevent the accrued interest from becoming too large.
Lifetime mortgages can be used for a wide range of purposes, with some of the most common reasons being to clear other debts (including other mortgages), and to support younger family members with expenses such as education, property purchases and weddings.
How do Lifetime Mortgages work?
In the same way as you’d approach a standard residential mortgage; a lender will want to look at the value of your property and how much you wish to borrow. As the sum will only be repaid on the death of the final borrower (or the borrower being moved into permanent care), age is also a critical area that the lender will want to look at for a lifetime mortgage.
There are typically two structures for repaying a lifetime mortgage:
Interest Roll-Up: Where there are no repayments, and therefore the interest is ‘rolled-up’ into the amount owed on the loan coming due for repayment (either when the final borrower dies or is moved into permanent care)
Interest Paying: Where there are repayments due (either regularly monthly payments or ad-hoc payments as-and-when the borrower wishes). This typically means there is less interest to pay over the duration of the loan.
Most lenders provide the option to either take the loan as a lump sum (where interest on the full amounts starts to accrue from day one), or as a draw-down service where funds are only taken as-and-when the borrower needs (and therefore interest is only charged on what funds have been taken). Both options have their own pros and cons, so it is essential to speak with a specialist equity release Financial Advisor to understand which products would be best suited for your circumstances.
Am I eligible for a Lifetime Mortgage?
Whilst several elements of eligibility criteria for lifetime mortgages vary from lender to lender, the typical three core requirements are as follows:
1) The borrowers must own a property, with sufficient equity to borrow against (the value of the property minus any mortgages or debts secured against it)
2) The borrowers must be over 55’s (although some lenders may have a higher age criteria)
3) The property must be of a minimum value, typically £70,000
As the criteria does vary, it’s essential that borrowers take advice from a specialist Mortgage Advisor before selecting a specific lender or product. Start your journey today by finding an experienced equity release Financial Advisor below.
How much can I borrow with a lifetime mortgage?
There are several factors that impact the amount you can borrow with a lifetime mortgage, including your age, the value of your property, and the specific plan you choose. For example, older applicants can generally borrow a higher percentage of their property’s value.
As a rule of thumb; with a lifetime mortgage you can typically borrow between 20% to 60% of your property’s value. For example, if you own a property worth £400,000, you would typically be able to borrow between £80,000 (20% of the property value) and £240,000 (60% of the property value)
Given the number of variables that impact borrowing levels, it is essential to speak with a qualified Financial Advisor who can assess your individual circumstances and provide tailored guidance.
What are the different types of lifetime mortgages available?
There are broadly two types of lifetime mortgage plans available; a lump-sum lifetime mortgage or a drawdown lifetime mortgage.
Lump-Sum Lifetime Mortgage: As the name suggests; you receive your loan as a one-time cash-free lump sum, which you’re able to spend as you wish. Whilst this can be helpful when the funds are being used to cover a major expense, it does mean that the interest on the mortgage start to accrue from day one, and compounds over the lifetime of the loan, potentially making it the more costly option.
Drawdown Lifetime Mortgage: With a drawdown mortgage, the cash can be released flexibly as and when it’s required. This is often helpful for borrowers who don’t have a pressing need for the full sum from day one, and the key benefit is that interest is only charged as-and-when the funds are drawn down, potentially making it a cheaper option over the lifetime of the loan.
As well as the plan type, there are generally two repayment methods available; an interest roll-up loan or an interest paying loan.
Interest Roll-Up: With an interest roll-up plan, there are no repayments to be made on the loan. Instead, the interest is accrued and compounds over the lifetime of the loan. On the death of the final borrower (or if they move into long-term care), the house is sold in order to pay both the loan amount and the accrued interest. This is often the preferred method for borrowers who do not have excess income in later life, and therefore wish to avoid making monthly repayments.
Interest Paying: With an interest paying plan, the borrower is able to make either regular or ad-hoc repayments against the loan. This reduces the amount of interest being accrued, and can greatly decrease the total amount repaid over the lifetime of the loan. This can be the preffered method for borrowers who are eager to maximise the remaining equity in their property on their death in order to leave a larger inheritence.
With all these options, as well as the large number of additional lifetime mortgage features that are available, it’s essential to speak with a Financial Advisor that has specialist experience with equity release mortgages. They will be able to review your circumstances and correctly advise on the best product for you.
How much does a lifetime mortgage cost?
With a lifetime mortgage there are two areas of costs that borrowers need to pay:
Interest: Firstly, there’s the actual interest you will pay on the loan. In a similar way to a traditional residential mortgage; these rates vary from lender to lender, and are heavily influenced by the Bank of England base rate. It’s worth nothing that equity release mortgages typically run at higher rates than residential mortgages, and over the last 5 years we’ve seen average lifetime mortgage rates typically run between 1.5% – 2% higher than average residential mortgage rates.
Set-Up: Secondly, there are the one-off costs that come with setting up the mortgage. These include the fees you will pay for a Financial Advisor and the fees you will pay for a Solicitor, both of which are essential in the process. On top of this, there are often arrangement fees charged by the lenders themselves for setting up the loan (however some lenders do provide fee-free deals). Whilst the exact levels of the one-off costs vary depending on your circumstances, the area you live and the deal you’re taking, we would typically advise that borrowers expect to pay around £3,000 in fees to set-up a lifetime mortgage.
What are the interest rates on a lifetime mortgages?
The interest rates on lifetime mortgages vary based on a number of personal factors, including your age, property value, and the amount you wish to borrow. The available rates also vary based on the current Bank of England base rate and broader lending landscape, very much in the same way that the rates available for standard residential mortgages often fluctuate.
As a rule of thumb, the interest rates for lifetime mortgages are typically more expensive than the equivilant rate for a standard residential loan, reflecting the additional risk taken by the lender (as they don’t know when they will be repaid). With this in mind, we usually see lifetime mortgage rates running around 1%-2% higher than standard mortgage rates.
As of summer 2024, with the Bank of England base rate set at 5.25%, we are seeing lifetime mortgage fixed rates around 5.75%-6.5%, with tracker rates averaging around 6.5%-7.5%
Can I repay a lifetime mortgage early?
Yes, you can repay a lifetime mortgage early, however there may be early repayment charges (ERCs) due when you come to repay. These early repayment chargers vary from lender to lender, and are typically charged as either a percentage of the loan amount or a fixed fee.
The Equity Release Council (the organisation aimed at raising equity release industry lending standards) asks all member lenders to allow borrowers the right to make penalty free payments, subject to lending criteria. However it’s important to read the terms and conditions of your lifetime mortgage to understand any potential penalties for early repayment.
If you believe that you may wish to pay your lifetime mortgage early, or make repayments against the loan, it’s important to discuss this up front with your financial advisor so they can help find lenders that offer flexible plans without early repayment charges.
Can I still leave an inheritance with a lifetime mortgage?
Yes, you can still leave an inheritance with a lifetime mortgage, however the amount will be reduced due to the loan and accrued interest. Some lifetime mortgage providers offer an inheritance protection guarantee feature (somtimes called a protected equity guarantee), which allows you to safeguard a percentage of your property’s value for your beneficiaries regardless of how much interest is accrued on your loan. This can give peace of mind to borrowers who want the benefits of a liftime mortgage, whilst still ensuring their family are looked after on their death.
It’s important to discuss your inheritance plans with your financial advisor so they can help find a lifetime mortgage plan that works for both you and your family.
How does a lifetime mortgage affect my benefits?
A lifetime mortgage can affect your eligibility for means-tested benefits such as Pension Credit and Council Tax Reduction. This is because releasing equity through a lifetime mortgage can increase your savings (or the amount of cash you have access to), and therefore potentially disqualify you from receiving certain benefits.
With this in mind, it is essential to consult a financial advisor and assess the impact on your benefits before making any decisions on a lifetime mortgage.
How do I apply for a lifetime mortgage?
To apply for a lifetime mortgage you should start by consulting a qualified equity release advisor (you can view several specialist advisors in the listings above).
They will be able to review your circumstances and assess your needs, and from there they will be able to recommend suitable plans and providers. They will also be on hand to guide you through the application process. During the process you will also need a solicitor to handle the legal aspects of the process. Remember that it’s worth spending the time comparing your options when it comes to selecting the right partners for your application, as not only will it ensure you’re working with the right team; it will help you get the best value for money.
What is the difference between a lifetime mortgage and a home reversion plan?
A lifetime mortgage allows you to borrow money against your property’s value while retaining full ownership, much like a traditional mortgage. Whereas a home reversion plan involves selling your property (or a portion of it) in exchange for a tax-free cash lump sum or regular income, whilst still getting to live in the property.
Lifetime mortgages are generally more popular due to the flexibility and ability to maintain home ownership, however the choice between the two are highly individual based on your personal circumstances and longer term financial plans. This is why it’s critical to speak with an experienced financial advisor before deciding which route is best for you.
Can I move to a new home with a lifetime mortgage?
Yes, moving home with a lifetime mortgage is usually possible. The key caveat is that your new property meets your lender’s requirement and contains enough equity to provide acceptable security for the loan.
Lenders do understand that your needs may change over time, so they set out to show flexibility when it comes to borrowers moving home. Just remember that if you’re downsizing, you might need to pay back a part of the loan, especially if the new property is worth less than your current home. These repayments may be subject to early repayment charges, so it’s key to discuss any potential plans to move home with your financial advisor before you commit to a lifetime mortgage.
What are the pros and cons of lifetime mortgages?
A lifetime mortgage is a unique financial product that offers a number of advantages to borrowers, however there are also circumstances where equity release may not be the most suitable option.
On the plus side, the money released via a lifetime mortgage is tax-free and can be used for a large number of purposes. There are also no monthly payments, which is usally the drawback of taking a more traditional loan in later life. Another key benefit is that the borrower retains ownership of their home and continue living there for the remainder of their life (or until they move into long term care). Finally, there are numerous flexible options around how lifetime mortgages are set-up and distributed, which means they can be tailored to suit your specific requirements.
Whilst these benefits make lifetime mortgages an attractive option, there are several things borrowers need to consider to avoid disappointment. First and foremost; it’s key to understand that the accrued interest from a lifetime mortgage can accumulate to the point where there is little-to-no inheritence remaining to leave your estate. There’s also a potential impact on means-tested benefits such as pension credits and council tax reduction, which could impact your ongoing finances. Finally, it’s important to consider that there could potentially be early repayment charges if you choose to clear the loan or make overpayments.
It’s important to speak with an experienced Financial Advisor in order to talk through each of these opportunities and risks, and ensure that a lifetime mortgage is the right product for your needs and circumstances.
How can I ensure my lifetime mortgage is regulated and secure?
Lifetime mortgages, as with all equity release products, are heavily regulated by the Financial Conduct Authority (the FCA), the UK financial regulatory body. They are responsible for regulating financial firms and individuals that provide financial advice and services, helping to protect UK consumers. All firms offering lifetime mortgages or other equity release products, as well as advisors offering equity release advice, must be registered with the FCA. You can check the FCA financial services register to confirm the details of your advisor and lender.
As well as FCA protection, we would strongly recommend only working with lenders who are members of the Equity Release Council (the ERC), the trade association which sets standards and best practices for the industry and works to ensure that the equity release market is transparent, fair, and operates in the best interests of consumers.
By selecting a provider that adheres to FCA regulatory requirements and follows the ERC’s guidelines, you can be confident that your lifetime mortgage is secure and that your best interests are being considered throughout the process.
For more information, read our in-depth guide on managing risks with an equity release mortgage.
What is a draw-down lifetime mortgage?
A drawdown lifetime mortgage is structured so that the tax-free funds from your equity release plan can be taken (or ‘drawn down’) as-and-when you need them, rather than as a single upfront lump sum.
Whilst receiving the full amount as a lump sum on day-one of your lifetime mortgage may seem appealing, it also means that you will be accruing interest on the full amount of the loan from the very start. Over the lifetime of the mortgage, this can compound to a large amount.
The beauty of a drawdown lifetime mortgage is you are only charged interest on the money you’ve taken, which means the build up of interest can be much lower. This can be a great solution for borrowers who don’t need the full amount up-front, for example if a borrower was using a lifetime mortgage to supplement their retirement income on an ongoing basis.
This is a key reason why it’s critical to speak with a specialist equity release Financial Advisor, as they will be able to review your circumstances and plans and advise on which method or receiving the lifetime mortgage funds is right for you.
When is a lifetime mortgage repaid?
A lifetime mortgage is designed to be a long-term loan, with the repayment occurring when the homeowner passes away or moves into long-term care. In the case of a joint lifetime mortgage, the repayment would be only due on the death (or move to long-term care) of the final borrower. The loan, along with any accrued interest, is repaid using the proceeds from the sale of your property, ensuring that you can continue living in your home for the rest of your life or until you need full-time care.
Some borrowers do choose to repay some or all of their lifetime mortgage during the loan term in order to reduce the accrued interest levels, however these repayments can be subject to early repayment charges (often abbreviated to ERCs). It’s important to discuss your plans for the loan with your financial advisor to ensure you’re selecting the right lifetime mortgage and avoiding any unnecessary charges.
Who is the best lifetime mortgage provider?
Some of the UK’s most trusted financial brands offer lifetime mortgage products, including Aviva, Legal & General, Scottish Widow & Canada Life. However, a trusted name doesn’t necessarily mean the best product, and there are several factors that a Financial Advisor would look at to determine the best fit for you, including:
- The interest rates on offer
- Key eligibility factors such as age and max/min LTV levels
- The flexibility of the product
- Adherence to Equity Release Council standards
- Any Early Repayment Charges on the product
- The initial costs for setting up the loan
As well as these headline factors, they will also look at the finer T&C’s of each provider and product to ensure that it’s the right fit for your plans and circumstances.
With all this in mind; whilst checking the reputation of a provider is important to provide peace of mind, finding the best provider will be highly subjective based on your circumstances and it’s critical to consult with a Financial Advisor experienced in lifetime mortgages.
What happens with a lifetime mortgage what happens when you die?
When a homeowner with a lifetime mortgage passes away, the loan becomes due for repayment. Typically the executors of the estate are given a period of time, usually 12 months, to sell the property and repay the outstanding loan amount, along with any accrued interest. If the property is jointly owned and one partner passes away, the surviving partner can continue to live in the home, and the loan repayment will be deferred until they also pass away or move into long-term care.
It’s key to understand that lifetime mortgages in the UK often include a “no negative equity guarantee” (one of the standards required of all Equity Release Council members), ensuring that the final amount owed will never exceed the property’s value, protecting the deceased’s estate from additional debt even after the property sale.
An experienced Financial Advisor will be able to discuss your plans for inheritance and help ensure that both your lender and plan suit your wishes for your estate.
