This guide takes a closer look at how lifetime mortgages work, the different options available, the pros and cons of applying for a lifetime mortgage, and whether it’s the right choice for you.
A lifetime mortgage enables you to borrow money secured against your home, as long as it is your main residence. It provides homeowners with a tax-free cash sum which they can spend how they wish, while still owning and living in their home.
A lifetime mortgage is a form of equity release which allows you to unlock cash from your property without having to sell your home.
The percentage of the property you can borrow against will depend on your age and you will usually find that the older you are, the more you can borrow. Typically, lenders will let you borrow somewhere between 25% and 60%.
If you wish, you can ring-fence, or separate, a portion of the value of your home as inheritance for your family.
Lifetime mortgages do not have to be repaid until you die or move into long-term care. This means that until then, you can still continue to live in and maintain your property as usual.
When you die or move into long-term care, your property will be sold, and the proceeds of the sale will be used to repay the loan. Should there be any funds left over, these will go to your beneficiaries, as set out in your will.
There are a number of different types of lifetime mortgage so you will need to consider which one best meets your needs before making your decision. The main types are as follows:
With a roll-up lifetime mortgage, you receive a lump sum or are paid a regular amount of money and interest is then added to the loan. You won’t need to make regular payments as the interest is ‘rolled-up’ over the full term and added to the amount you need to repay at the end of your mortgage term when your home is sold.
With this type of lifetime mortgage, you receive your lump sum and then make regular interest payments on your loan. This will reduce the amount that will later need to be repaid when your home is sold.
This allows you to release your cash over time rather than taking a lump sum, enabling you to access your cash as and when you need it. There will usually be a minimum amount you must withdraw, but interest will only be charged on the amount released, rather than the full lump sum.
If you have a lower-than-average life expectancy, perhaps due to a medical condition or because you are a regular smoker, you may qualify for an enhanced lifetime mortgage deal which enables you to unlock more cash from your home at better interest rates.
With a flexible lifetime mortgage, you can make voluntary payments to reduce your loan amount. As with other types of lifetime mortgage, you will still be able to take a cash lump sum.
If you want to pay off your lifetime mortgage early – perhaps because you are looking to sell your property or want to remortgage to take advantage of a cheaper deal – you will need to inform your lender.
Just be aware you may have to pay a hefty early repayment charge for getting out of your existing deal early. It’s always best to check what this is before agreeing to a lifetime mortgage deal to avoid any unpleasant surprises.
To qualify for a lifetime mortgage, you will need to be over the age of 55 and own your own property in the UK. Your property will need to be your main residence and lenders usually require it to be worth a minimum amount, say £70,000.
Note that some lenders will not offer lifetime mortgages on homes that are a Grade I or II listed building, those that have a thatched roof, or if the property is above or next to commercial premises.
Before considering a lifetime mortgage, it’s important to make sure you have understood both the advantages and drawbacks of using one to help increase your income in later life:
Tax-free lump sum: you can boost your income by taking a lump sum in one go, or by taking a number of smaller sums as and when you need them
Nothing to repay in the short-term: depending on the type of lifetime mortgage you choose, there will be nothing to repay until you die or move into long-term care
No restrictions on spending: you can spend the cash on whatever you need it for
You can stay in your home: you can continue to live in and maintain your home as usual
You can leave an inheritance: when your home is sold, the loan will be paid off in full and any money left over can be passed on to your family, as stated in your will. Alternatively, you can choose to ring-fence, or protect, a portion of the value of your home to pass on as inheritance
Inheritance may be reduced: although you can protect some of your inheritance, the amount you can leave to loved ones will still be affected
Risk of negative equity: if you choose to roll-up interest with your lifetime mortgage, the amount you owe in interest can end up being higher than the value of your home. As a result, your beneficiaries can end up owing money to your lender once you’ve passed away. To avoid this, look for a lender that has a no-negative-equity guarantee
You must sell your home: you must agree to sell your property when you move out, which means you will not be able to pass it on to family members
Less freedom to move: should you want to move to a different property, your lifetime mortgage lender will need to ‘approve’ your new home before you can do so. If the new property is more expensive than the equity in your existing home, you may not be able to move
High interest rates: interest rates on lifetime mortgages are generally higher than on a conventional mortgage
You may lose means-tested benefits: taking out a lifetime mortgage could affect your entitlement to means-tested benefits – those that are awarded based on your income and how much capital you have, such as council tax support, pension credit and the Cold Weather Payment
Note that the equity release market is regulated by the Financial Conduct Authority (FCA). It is also worth choosing a lender that is a member of the Equity Release Council as all members must abide by the Council rules which gives you an extra layer of protection.
Before agreeing to a lifetime mortgage, you should also bear in mind that you may have to pay the following costs:
Arrangement or application fees: these are paid to the lender to set up the mortgage. You may be able to add this to your mortgage, but it will usually work out to be more expensive
Legal fees: to cover solicitor costs. You lender may request that you choose one from their panel of solicitors
Valuation fees: your lender will need to carry out a valuation of your property before offering you a mortgage
Buildings insurance: most lenders will insist you have this in place before offering you a lifetime mortgage
Adviser fees: if you have sought financial advice to help you set up a lifetime mortgage
Early repayment charge: if you want to pay off your mortgage early
Lifetime mortgage interest rates vary depending on the type of mortgage you choose, but according to the Equity Release Council’s Spring 2020 Market Report, 2 out of 5 equity release products have rates lower than 4%.
The money you receive through taking out a lifetime mortgage can be used for whatever you need it for. This might include:
Funding home improvements: such as a new kitchen, a loft conversion, or extension
A trip of a lifetime: perhaps you want to treat yourself to a trip around the world once you’ve reached retirement
Supporting your retirement: you can use cash you have unlocked to help fund your retirement if your pension and savings are not sufficient
Paying off other debts: such as a personal loan or credit cards
Supporting your family: you might want to help family with university fees or help your children or grandchildren get on the property ladder
Lifetime mortgages won’t be the right choice for everyone. Whether it is the right decision for you will partly depend on whether you would lose your entitlement to benefits such as pension credit and council tax support, as well as whether it will significantly affect how much you can leave as an inheritance.
However, it’s worth keeping in mind that older borrowers often find it easier to take out a lifetime mortgage rather than remortgage. Tighter affordability checks and income requirements mean that lenders are often reluctant to offer a remortgage to those who have retired.
Before making your decision, it can be worth speaking to a financial adviser and also considering some of the alternatives…
Another option you might want to consider is a home reversion plan. This is another type of equity release where you sell all or part of your home in exchange for a cash lump sum, a regular income, or both. You can read more about home reversion plans in our guide.
If you’d prefer not to use equity release at all, you could consider downsizing and moving to a cheaper, smaller property. Alternatively, if you’re looking for another way to borrow money, you could use a personal loan or even a credit card if you only need to borrow a small amount.
Interest rates on personal loans can be competitive, and you may be able to borrow interest-free for a set number of months with a credit card. Just make sure you have a plan in place to repay the amount borrowed. If you use an interest-free credit card, try to clear it before the 0% deal ends and interest kicks in.