What is a Lifetime Mortgage?
Lifetime mortgages are a type of equity release loan secured against the value of your home. The 'lifetime' aspect of the mortgage means that you can borrow money now, and it doesn't need to be repaid until the last surviving borrower dies or moves into long-term care. You are still the legal owner, and you can continue living inside the property until then.
Lifetime mortgages are one of several later-life mortgage options where you can release tax-free cash, regardless of your income. You can sell all or some of the property and live in it rent and interest free, with a home reversion.
- You can choose to pay monthly interest payments or add it to the loan to be repaid on sale.
- You can take your tax-free cash as a lump sum or just draw down what you need, when you need it.
- The value of your home must be at least £70,000, and it must be located in the UK.
- The youngest owner must be 55 or over.
- You can borrow up to 55-60% of the value of the home, depending on your lender.
- The amount you owe can double every 15 years, so taking out a lifetime mortgage isn't a good solution if you want to leave an inheritance behind (based on 5% interest rolled up).
- Taking out a lifetime mortgage can be very expensive. Read more - What is the equity release solicitor cost & process?
How does a lifetime mortgage work?
The property must be your main residence. Depending on the specific lifetime mortgage product, you may be able to ring-fence some of the property value to leave as an inheritance in your will. You still own your home, so you will still be responsible for looking after the property and maintaining it well.
Lump sum versus drawdown facility
You can choose a lifetime mortgage, which gives you the full value of the loan in one lump sum, which is good if you need a lot of cash for a big expense. Alternatively, you can opt for a drawdown facility, which often comes with a minimum amount you can take out at a time. This means you'll only pay interest on what you've drawn down so far rather than the full amount, so works well if you want a bit of extra cash to top up your income and cover ongoing expenses.
Interest roll-up mortgage versus Monthly interest
In most lifetime mortgages, the interest due each year is added to the loan's value, so you won't have to pay anything until the house is sold. This can greatly increase the loan's value over time, as the lifetime mortgage interest rates will be applied to a larger debt each year. Choose a lifetime mortgage with a no-negative-equity guarantee to ensure the amount you owe can't grow to be more than the total value of the property.
You can opt for an interest-paying mortgage, which allows you to pay the interest only each month or on an ad hoc basis. This means the loan amount stays the same throughout.
Some cash lump-sum mortgage products will allow you to repay some of the capital, too, if you want to, reducing the amount to be repaid when the house is sold.
Interest rates are important to consider when releasing equity. The rate could rise significantly with any Bank of England base rate hikes if it is variable. The Equity Release Council has standards that some lifetime mortgage providers follow, and you will need independent legal advice from a solicitor.
What is the Equity Release Council?
The Equity Release Council is the industry body which promotes high standards of conduct and practice in the equity release sector. They set standards which safeguard consumers, so you should choose a lifetime mortgage product from a verified member.
If you opt for an equity release provider who is a council member, the lifetime mortgage will be subject to equity release council standards, meaning the variable interest rate will be capped. You'll be protected against falling into negative equity. Read more - What is the equity release solicitor cost & process?
Are you looking to learn about shared appreciation mortgages (SAM)?
What is a no negative equity guarantee?
This is a guarantee that the lifetime mortgage debt is capped at the property's value when sold.
Am I eligible for a lifetime mortgage?
Each lender will have their own eligibility criteria for their specific mortgage products.
The property.
The property must be located in the UK; you'll have to check with your mortgage broker to see if a lender will consider equity release on a home in Northern Ireland or the smaller British Islands.
The property must be worth at least £70,000, and it may even have a small existing mortgage.
The homeowners.
You must own the home but may already have an outstanding mortgage. The youngest owner must be over the age of 55, but there are some products which are only available for people over 60. A retirement interest-only mortgage may be suitable if you are under 55. Beware of lifetime mortgages, which require a partner under 55 to come off the property deeds; the younger partner could lose their home when the elder partner dies or moves into long-term care. Read more - Selling parents house to pay for care
You should consider how much money you need. Generally, the minimum loan amount is £10,000, but some lenders have a minimum loan of £100,000 for higher-value properties.
Your credit rating matters less with a lifetime mortgage as you're never expected to repay the capital yourself (it comes from the house sale). You won't be able to get equity release if you are bankrupt, but some lenders will grant you a lifetime mortgage with bad credit and even CCJs.
Speak to an independent mortgage broker who can recommend mortgage products to suit your priorities.
How much can you borrow with a lifetime mortgage?
You can usually borrow 20% to 60% of the value of the property. The amount you can borrow depends on the number and age of the owners. If you need to borrow a higher amount, a reversion mortgage may allow you to borrow 80% to 100% of the property value.
Can I get a lifetime mortgage on a shared ownership property?
Yes. This is only possible if the amount you borrow is enough to purchase the remaining shares immediately, so you obtain 100% ownership and keep the cash left over.
What are the disadvantages of a lifetime mortgage?
Pros
- The cash is tax free and you can spend it almost however you like.
- You get to stay in your home.
- An interest roll-up mortgage has no ongoing costs after the initial set up costs, so your monthly outgoings won't increase.
- With a draw-down facility, you can just take the money out that you need, which keeps the interest bill down.
- If your lender is a member of the Equity Release Council, you'll never owe more than the value of the house, thanks to the no negative equity guarantee.
- You may be able to avoid having to pay inheritance tax on some of your estate by gifting some of the cash from the lifetime mortgage to a family member. (Gifts can sometimes be liable for inheritance tax, so check with a professional tax advisor if this is a factor affecting your decision.)
- If your circumstances change, you can usually repay the loan early; although this will be subject to an early repayment charge.
Cons
- If you don't pay interest, your debt will grow for as long as you live.
- You may miss out on means-tested benefits such as Pension Credit, Savings Credit or Council Tax Reduction due to the funds you have released.
- When you die or go into care, the loan must be repaid from the sale of the house. This means your family will not be able to inherit your home (unless other funds are available to repay the debt) and will only inherit what is left after the loan is paid off.
- Set up fees (and early repayment charge, if you choose to do so) can be expensive.
- You can't take out another loan on the property, although the existing lifetime mortgage provider may release further equity at a later date if there is more equity available in the property, at a later date.
Read about putting a house into a lifetime trust
What are the costs involved with lifetime mortgages?
When setting up your lifetime mortgage, there are a few standard costs which usually average around £3,000 in total:
- Arrangement fee
- Valuation
- Legal fees & Independent legal advice
- Funds transfer fee
Your arrangement fee and funds transfer fees are set by your lender. The valuation is carried out by a lifetime mortgage valuation surveyor, and the legal fees will depend on your equity release solicitor. If you'd like a bespoke quote for a valuation or an equity release solicitor, get in touch and we'll email and call you back to talk things through.
You might incur additional charges through the lifetime of the loan; for example, if you move home or want to sell part of the land, you'll have to pay for another arrangement fee, valuation, and legal costs on the new property.
The overall costs of a lifetime mortgage, including interest accrued over time, can be quite confusing. Your lender will require you to get professional equity release advice on the terms and conditions of the loan, to make sure you know what you're signing up for. Our equity release solicitors pore over every detail of your contract and explain the details to you in terms you can understand to protect you from nasty surprises further down the line.
Is a lifetime mortgage a good idea?
This really depends on the lifetime mortgage product you choose, which is why it's so important to get independent legal advice from an experienced professional.
Questions you should ask before deciding include:
- Can I transfer the mortgage if I want to move to a different home?
- What happens if I die soon after taking out the loan?
- Can I keep claiming my benefits?
- Can I repay the loan early, and what fees would be payable?
- What are the restrictions on the lifetime mortgage?
- Do you offer a no-negative equity guarantee?
Caragh is an excellent writer and copy editor of books, news articles and editorials. She has written extensively for SAM for a variety of conveyancing, survey, property law and mortgage-related articles.
