What is a Lifetime Mortgage?

A lifetime mortgage offers a unique opportunity to tap into your property's equity, granting you the financial freedom you desire in your golden years. However, this is a complex type of loan that comes with certain limitations you need to be aware of.

In this insight, we tackle the question, what is a lifetime mortgage,  what to look out for, and how to find an adviser for your needs.

Key Takeaways

• A lifetime mortgage is a type of equity release that allows homeowners to access some of the value locked up in their property without having to sell their property.
• The amount of money that can be released is based on the homeowner's age, property value, and the provider's terms and conditions.
• Lifetime mortgages can be used to receive a lump sum or a regular income.
• The interest charged on a lifetime mortgage can be rolled up and added to the loan amount.
• It is important to weigh the advantages and disadvantages before deciding if a lifetime mortgage is the right option for you.

What is a Lifetime Mortgage? 

A lifetime mortgage is an equity release option for homeowners to access their property's value without selling it. Based on age and property value, you receive a lump sum or regular income, retaining ownership. No monthly repayments are needed, and the loan is repaid when you die or sell the property

Let's say that you own a property worth £500,000, and you decide to take out a lifetime mortgage. The provider of the lifetime mortgage agrees to lend you a lump sum payment of £100,000, with an interest rate of 4%.

If you choose to roll up the interest, after 10 years, the loan amount would be £148,024. If you continue to roll up the interest, the amount owed would continue to increase. If you choose to pay the interest monthly, you would need to make payments of £333.33 per month.

When you die or sell the property, the loan, along with any accumulated interest, is repaid from the proceeds of the sale. If the property is sold for £600,000, the loan amount and any interest owed would be repaid from the proceeds of the sale, and you or your estate would receive the remaining amount.

How Do Lifetime Mortgages Work? 

A lifetime mortgage works by borrowing against the value of your home. The amount you can borrow with equity release depends on your age, the value of your property, and the provider's terms and conditions.

With a lifetime mortgage, you do not have to make any monthly repayments, and the interest charged on the loan can be rolled up and added to the loan amount or paid monthly. The loan, along with any accumulated interest, is repaid when you die or sell your home.

Interest rates on lifetime mortgages are usually fixed, which means that the interest rate does not change throughout the term of the loan.

As Interest can continue to roll up, it is important to consider how much equity you have available and whether you need to find a lifetime mortgage with a no negative equity guarantee.

No Negative Equity Guarantees

A no negative equity guarantee is a condition built into lifetime mortgages that wipes off any debt that exceeds the value of the property. For example, if interest continues to accumulate and house prices drop, any negative equity will not needed to be paid back after death. This protects your estate and your family from needing to pay any left over debts that may arise from equity release.

How Much Equity Can You Release with a Lifetime Mortgage?

With a lifetime mortgage, the amount you can release depends on factors such as your age, the value of your home, and your health. Typically, you can release between 20% and 60% of your property's value, with older individuals usually being eligible for higher percentages. This is because the loan provider assumes the risk of a decline in house prices, and the loan is repaid when you pass away or move into long-term care.

Try our Equity release calculator to find out a rough estimate of how much you can borrow.

Pros and Cons of Lifetime Mortgages 

Pros:

• You can receive a lump sum or a regular income.
• You continue to own your home.
• You do not have to make any monthly repayments.
• The interest rate is fixed.
• A bad credit score will be unlikely to impact your chances of approval.

Cons:

• The amount you can borrow is based on your age, the value of your property, and the provider's terms and conditions.
• If you sell a percentage of your property to a lifetime mortgage provider, it means that your estate's value will be reduced. This may affect the amount of inheritance that your beneficiaries receive.
• Lifetime mortgages are a long-term commitment, and it may be difficult to change your mind after entering into the agreement. If you decide to sell your property or move into care, you may have to pay a penalty for ending the agreement early.
• If you receive means-tested benefits, entering into a lifetime mortgage may affect your eligibility for these benefits. It's important to seek professional advice before making a decision.

Who can qualify for lifetime mortgages?

To qualify for a lifetime mortgage, you generally need to be over the age of 55, although some providers may require you to be older. The age of the youngest applicant is also taken into account for joint applications.

In addition, you must own your home and it should be valued above a certain threshold, which varies depending on the provider. It's important to note that you can still have an outstanding mortgage on your property, but the amount you can release will be lower.

Lifetime Mortgages vs Home Reversion Plans

While both home reversion plans and lifetime mortgages are types of equity-release schemes, lifetime mortgages are more commonly used. With a lifetime mortgage, you borrow money against the value of your home and the interest is added to the loan, which is repaid when you die or move into long-term care. 

Home reversion plans, on the other hand, involve selling a share of your home to a provider, who then pays you a lump sum or regular income in return.

If you're concerned about the compounding interest rates associated with lifetime mortgages, a home reversion plan may be a better option. However, it's important to consider the potential impact on your inheritance and seek advice from an equity release adviser before making a decision.

Is a Lifetime Mortgage a Good Idea?

A lifetime mortgage can indeed be a good idea if you need funds for retirement or improving your lifestyle. Nevertheless, it's vital to weigh potential costs and how it may affect your inheritance. Seek advice and explore alternatives before making a final decision

Can I pay off a lifetime mortgage early?

Yes, some lifetime mortgages offer the flexibility to repay the loan early without incurring early repayment charges. However, this can vary depending on the specific mortgage product you choose. It's crucial to review the terms and conditions of the mortgage and discuss the early repayment options with your lender. If early repayment is an important consideration for you, it's advisable to seek advice and explore different lifetime mortgage options to find the one that best suits your needs.

Is there an alternative to a Lifetime Mortgage?

Yes, there are two options: regular remortgage and Home reversion. With a regular remortgage, you pay back the loan while you're alive. With home reversion, you sell part of your home and pay it back after you pass away or need long-term care.

Advice on Lifetime Mortgages

Before proceeding with a lifetime mortgage, it's essential to seek advice from an equity release adviser who is a member of the Equity Release Council. This ensures that the adviser adheres to the council's standards of advice in the industry.

If you're unsure where to start, you can complete the Sunny fact find to help us find you an adviser who is best suited to your needs. Your adviser will then contact you to discuss your circumstances and how they can assist you in deciding how to proceed.