A lifetime mortgage is a form of equity release for your property. With a lifetime mortgage, you can get a loan secured against your home based on the property value. This means you keep the ownership of your home and either pay back the loan when the property is sold after you pass away or if you move into long-term care.
What is “equity”?
Equity simply means the share of your property that you own. If you own your property outright and it is worth £300,000, you own £300,000 worth of equity in your property. If you have a mortgage on your property and it is worth £300,000, but you have an outstanding mortgage amount of £100,000, you own £200,000 worth of equity in your property.
How does a lifetime mortgage work?
With a lifetime mortgage, you can live in your home usually until you pass away or move into long-term care. You retain ownership of your property until this point, and you then usually sell your property and use this money to pay off your loan amount.
Your lifetime mortgage loan is secured against your home's value, and interest is charged on the amount you have borrowed. You can either pay interest as you go with monthly repayments or add this to the final total loan amount to be repaid. As a lifetime mortgage provides a tax-free cash flow to spend as you like, it can be an excellent tool for making the most out of your retirement.
There are many different reasons someone may want to use a lifetime mortgage to release equity, such as:
- Cash injection for you to enjoy your retirement. This can be used for day-to-day things or even holidays to make the most of your money.
- Helping family members or loved ones get on the property ladder. The money you get from your equity release could provide a deposit for a family member, helping them get started on their future while also allowing you to keep ownership of your property.
- Making home improvements. This cash flow could also help with renovating your property.
- Paying off short-term debt. This can be a risky option if you are in debt, and you should consider speaking to a financial expert before taking out any form of loan in order to pay off debt.
- Covering costs for a big event. Equity release can be used to pay for a big life event, such as a wedding or helping family with a big move.
You have the option of an equity release plan which allows you to access all of your money at once, or you can access small portions of your money as you need to. Usually, lifetime mortgages release between £10,000 and £100,000 from your property. There are many lifetime mortgage calculators available online if you wish to find out how much you could potentially release from your property value, or you can speak to an expert for financial advice.
Who should apply for a lifetime mortgage?
When you’re approaching retirement or in your retirement years already, you could wonder how to make the most of your current finances and enjoy your retirement. Lifetime mortgages can be a great option for equity release if you own property and you don’t wish to sell your property or try a traditional remortgage.
There are so many reasons you might want to have a cash boost in your retirement, even if it’s just to treat yourself to an easier day-to-day life or to some lovely holidays. Having this extra cash could make a huge difference in your retirement.
Like any type of loan, lifetime mortgages come with some eligibility requirements. These criteria often include the following:
- You usually must be 55 years or older.
- Have no outstanding mortgage or a small percentage of your mortgage left to pay; this can usually be covered by the equity release you take out on the property.
- The lifetime mortgage has to be on your main residence.
Loan providers may also consider your property's value before they offer you a loan. If you want more information on how much you could get with a lifetime mortgage, you can either use an equity release calculator or speak to an equity release adviser to discuss your options. If you decide to discuss your options with an equity release adviser, make sure they are regulated by the FCA (Financial Conduct Authority), as any advice they provide has to meet certain standards.
Pros and cons of lifetime mortgages
Every type of loan will have certain pros and cons to consider before you decide on the best option, and lifetime mortgages are no exception. There are many benefits to this type of equity release, but there are also many potential drawbacks to think about.
Advantages of lifetime mortgages:
- You keep ownership of your property until you pass away or move into long-term care. You won’t be forced to move out or downsize your property.
- If you did wish to downsize or move to a different property, with certain equity release mortgages, you can still have this flexibility as long as the new property still meets the loan requirements.
- Any money left over once your property is sold and your loan is repaid can still be left as an inheritance.
- If you choose a lifetime mortgage meeting the Equity Release Council standards, you cannot owe more than the value of your property due to the negative equity guarantee. This means you won’t end up leaving your family in debt.
- You can use your lifetime mortgage to boost your finances. This could open up many options for you to enjoy your retirement in various ways or to help out your family members.
- You can use your loan to pay off the remaining mortgage if you still have some left to pay. If you have any remaining mortgage to pay, most lifetime mortgages will require this to be paid off before you take out your loan or use a portion of the loan from your equity release. You should bear in mind any potential early repayment charges from this.
Disadvantages of lifetime mortgages:
As with any type of loan or mortgage, there will be some costs you need to take into consideration.
- Application fees
- Legal or valuation fees
- Lender fees or completion fees
- Insurance costs
- Early repayment fees if you still have some of your mortgage left to pay
Other drawbacks to consider with a lifetime mortgage include:
- Potential extra expenses for your family members or loved ones. Depending on what type of loan and deal you get with your mortgage, you may be leaving your family with some expenses to pay.
- Less to leave as an inheritance. If you take equity out of your property, you will inevitably not have as much in property worth to pass on to your loved ones in an inheritance.
- Negative equity if your lender is not a member of the Equity Release Council. If you choose not to repay interest every month and wish to add it to your final repayment, the interest you owe could end up higher than the value of your home. Your beneficiaries could then be required to repay your lender once you pass away.
- Lifetime mortgages require you to sell your property, meaning you cannot leave your property in an inheritance.
- Any renovations or major changes to your home might be limited by your lender's requirements.
- Taking out a lifetime mortgage can also affect your eligibility for means-tested benefits.
What are the different types of lifetime mortgages?
There are many types of lifetime mortgages to consider before deciding which option is best for you. Some of the main lifetime mortgage types include:
Interest-only lifetime mortgages
An interest-only lifetime mortgage means that rather than paying off all the interest at the end of your loan period, you pay off a certain amount each month. You still get your cash lump sum from the lifetime mortgage, but this lessens any extra payments needed for the end of your home possession.
Drawdown lifetime mortgage
Drawdown lifetime mortgages give you the flexibility to release cash over time rather than in one lump sum. Interest is only charged on the amount of cash you have taken. This type of loan can be helpful if you know you will need small amounts of money in the future but do not need one large sum at once.
Flexible lifetime mortgage
With a flexible lifetime mortgage, you can make voluntary payments to decrease the final amount required to repay your loan.
Roll-up lifetime mortgage
Roll-up lifetime mortgages have no monthly payments on your loan, and you repay the full loan with interest by selling your property when you pass away or move into long-term care.
Enhanced lifetime mortgage
Enhanced lifetime mortgages are only available for those with certain medical conditions and have specific requirements. If you are eligible, you can access better-than-average lifetime mortgage rates.
Things for you to consider before taking out a lifetime mortgage
As of May 2023, lifetime mortgage interest rates are expected to be roughly between 5.68% and 7%. The interest rates a lender offers will differ based on certain factors, such as certain elements of your loan repayment plan, the type of lifetime mortgage you have chosen, and your LTV (loan-to-value) ratio.
Taking out a lifetime mortgage may affect your entitlement to certain benefits and may impact your pension credit or council tax benefits.
There are other options you should consider alongside looking at lifetime mortgages. Such as downsizing your property and using the profit for the extra cash flow you need, taking out an unsecured loan, or remortgaging.
A lifetime mortgage can be a great way to release some of your finances for you to use to improve your later life. As there are so many variations on the types of lifetime mortgages available, something should be available to suit your requirements.