What is a Lifetime Mortgage?
A lifetime mortgage is a long-term loan secured against your home.
A lifetime mortgage gets repaid either:
- When you go into long-term care.
- When you die.
The mortgage is repaid by selling your home. Any additional amount owing is paid from your estate upon your death.
How do Lifetime Mortgages Work?
Most lifetime mortgages offer fixed rates of interest, although variable rate lifetime mortgages are available.
If you are considering a lifetime mortgage, think carefully about whether a fixed or variable rate deal is best for you.
- Choosing a fixed-rate lifetime mortgage deal means you’ll know what is repayable at a specific time if you were to go into care or die.
- Choosing a variable-rate lifetime mortgage removes the fixed cost element, but depending on how interest rates fluctuate, may be cheaper.
Unlike a conventional mortgage, where your mortgage lender charges interest on a loan that decreases with time, interest on a lifetime mortgage is charged on a sum of money that increases. As a result, your debt can snowball.
Your lifetime mortgage is an increasing sum because you don’t make any repayments. Therefore, the interest is continuously added to the outstanding debt, which will continue to grow. Imagine you had a credit card that you maxed out but never made a payment. The situation with a lifetime mortgage is similar.
With a lifetime mortgage, you'll never have to repay more than the actual value of the property. The Equity Release Council (ERC), the trade body for providers of lifetime mortgages, guarantees anyone who takes out the product won't ever find themselves in this situation.
Nonetheless, lifetime mortgages and equity release remain a hugely controversial topic among many people.
What are the Lending Criteria for Lifetime Mortgages?
Equity release providers usually have strict lending criteria. The most important often is your age; this determines the basis of your equity release calculation. The minimum eligible age for a lifetime mortgage is typically 55 or 60, depending on the lender. If you apply for a lifetime mortgage as a couple, lenders will make a calculation using the age of the youngest applicant. You may need to wait until you are both over the age of 55 or 60 before looking for a lifetime mortgage.
The percentage of the value of your property you can borrow against depends on how old you are; the older you are, the more you can borrow.
- If you’re under 65, you may only be able to borrow 25% to 30% of the value of your home.
- If you’re over 65, you may be able to borrow up to 60% of the value of your home.
Is There a Minimum Loan Requirement for a Lifetime Mortgage?
Most banks and building societies that offer lifetime mortgages have minimum lending levels ranging from £10,000 to £45,000.
Your home will also need to have a value above a specific amount to allow you to apply for a lifetime mortgage. This value is usually between £70,000 and £100,000.
What are the Different Types of Lifetime Mortgages?
There are several types of lifetime mortgage. You should carefully consider each and take independent financial advice if necessary, to find the right deal for you.
Standard Lifetime Mortgages
The most basic lifetime mortgage is a lump-sum loan.
All interest payable is “rolled up” over the full term of the loan.
You pay nothing for the rest of your life. Still, interest compounds until you die or move into a residential care home. Most lump-sum lifetime mortgages offer fixed interest rates.
Some companies offer a flexible lifetime mortgage, meaning you can take a smaller amount at the outset and then draw down further borrowings if or when required. Since you only pay interest on what you've borrowed, the total cost of equity drawdown can be considerably lower.
Interest Repayment Option
Some mortgage providers allow you to pay off some, or all, of the interest during the term.
Interest repayment lifetime mortgages are the most cost-effective method of equity release as the amount you owe never changes. It also, therefore, may safeguard more of your children's inheritance.
Enhanced Lifetime Mortgages
Some lifetime mortgage lenders offer more funds to those with shorter life expectancies, such as smokers, heavy drinkers, and those with long-term ailments.
They are commonly used to help fund modifications and renovations to a property where these are necessary to maintain quality of life.
What are the Potential Drawbacks of Lifetime Mortgages?
While lifetime mortgages offer the chance to release at least some of the value of your home, there are several significant drawbacks that you should consider before proceeding.
The cost of a lifetime mortgage can be vast. In some cases, the costs involved may drain the full value of your home, leaving little for your children to inherit when you die.
Early Repayment Penalties Often Apply
Many equity release schemes don't allow you to pay off any of the loan because the initial rate set is based on interest gradually building up over the full term. You may need to pay a vast sum to repay your lifetime mortgage early.
Most equity release loans arranged with members of the Equity Release Council are “portable,"
meaning you can transfer your mortgage from your existing property to a new one. However, moving can be complicated if the property you want to move to is more expensive than the equity remaining in your current property.
Loss of Means-Tested Benefits
Drawing extra money from the equity in your house may mean loss of eligibility for pension credit and council tax benefits.
Is a Lifetime Mortgage for You?
Choosing a lifetime mortgage is a significant decision not just for you but for your entire family and is not something you should do without strong consideration.