Last reviewed on 30th August 2023 by Martin Alexander (Mortgage Advisor)
A lifetime mortgage allows you to secure a loan against your home which isn’t repaid until death or in permanent care. What makes this mortgage unique is that you can release tax-free capital from your property without having to move home. Furthermore, lifetime mortgages are only available for those aged 55 or over.
It’s important to note that this is a financial commitment and requires careful consideration before deciding on what’s best for you.
What is a lifetime mortgage?
With a lifetime mortgage, you’re able to release equity by securing a loan against your home, providing it’s your main residence. You’d still be able to live in your home while enjoying some of the capital that’s accumulated over the years. This can be especially true if the value of your home has increased from the time you purchased it.
The main difference between a lifetime mortgage and a regular mortgage is that the loan doesn’t need to be repaid each month. Lifetime mortgages are typically repaid on death or if you go into long-term care. As a result, you aren’t tied into repaying the loan while you’re alive.
Learn more: Should I remortgage to release equity?
How does a lifetime mortgage work?
Once a lender secures a loan against your home, you’ll be able to release the capital that’s tied up in your home. The loan is repaid from selling the home when the last borrower dies or moves into permanent care.
Your beneficiaries will receive anything that’s left over once the property has been sold and the loan has been repaid. In comparison, if the sale of the property doesn’t cover the repayment of the loan, then your beneficiaries may have to repay the remainder of the loan. Beneficiaries may be able to use your estate to repay the loan without even having to sell your home to do so.
There are safeguards in place to protect your beneficiaries such as the no-negative-equity guarantee. With this in place, the lender guarantees that the beneficiaries won’t have to repay more than the value of the home. This can protect your beneficiaries from having to repay the loan if the proceeds from the sale aren’t enough.
It’s important to note that interest is charged on the loan, however, this can be added to the loan and repaid along with the entire loan. There are also options to repay the interest while you’re still alive.
As you’re still living in the property, you’d still be expected to maintain the home. Lenders have no obligation to maintain the upkeep of your property.
Are there different types of lifetime mortgages?
The three main types of lifetime mortgages are:
Lump-sum mortgages are very simple. You’d receive a large lump sum towards the start of your equity release. The interest is then ‘rolled up’ over the term of the loan. You won’t have to make payments until death or if you move into full-time care.
It’s important to note that if you take a large lump sum immediately, interest can rise quite significantly. This is because interest is compounded each year until the end of your mortgage term. Most lenders do offer a negative equity guarantee, that guarantees your property will repay the mortgage, even if it falls in value.
A drawdown mortgage allows you to withdraw money from your home when required. You’ll be able to choose an initial amount and also make further withdrawals from a reserve account when you need to. Think of this as a drawdown facility.
One of the main advantages is that the money held in your reserve account won’t be charged interest. Interest is only charged once you withdraw funds from your reserve account. This is a great way to keep interest charges to a minimum whilst having the security of knowing you can access your funds at any time.
Drawdown mortgages remain a popular choice for lifetime equity release. They can be ideal if you’re not in need of a huge amount of capital and offer flexibility which leaves you in control of your money.
This type of lifetime product allows you to make voluntary payments towards the mortgage balance. Some lifetime providers offer monthly repayment options, where you’ll be able to repay a fixed amount each month.
This type of mortgage can also be referred to as a flexible lifetime mortgage. This is because if you don’t want to repay anything each month, you won’t have to.
What are the pros and cons?
It’s always important to consider both the pros and cons of any mortgage you take.
- Stay in your home – Your living arrangements do not change and you still own your home.
- Tax-free cash – Access capital without having to pay tax.
- Leverage your assets – Capital that’s tied up in your home can be released.
- Spend the money how you choose – The loan can be spent any way you want, whether it’s helping children or simply enjoying retirement.
- Flexible repayment options – Lenders offer flexible ways and options to repay the loan
- Inheritance Protection – Some lenders offer options to safeguard a percentage of the property value as inheritance
- Safeguarding options – Most lenders offer a no-negative-equity guarantee, ensuring the loan is repaid even if the value of the home isn’t high enough
- Reduced inheritance – Although you can safeguard some inheritance, the overall inheritance from the property will decrease
- Inheritance tax – If you gift the loan elsewhere, the recipient may have to pay inheritance tax in the future
- Moving home can be difficult – If you move home, your lifetime mortgage will need to move with you
- Early repayment charges – Ending a lifetime mortgage early can often result in heavy early repayment charges
- Interest can build fast – You pay interest on the loan and also on the accruing interest amount so this can build quickly
- Losing entitlement to state benefits – If you’re receiving means-tested benefits, you may lose entitlement due to the income from the loan
Do I qualify for a lifetime mortgage?
Lenders vary in what they’ll offer each individual and also how they carry out their assessments. For instance, most lenders will only consider applicants aged 55 or over. Health conditions and lifestyle choices such as whether or not you smoke can also play a part in how your application is assessed and the options offered to you.
If you own an investment property, you may qualify for equity release on a buy to let. If so, the number of lenders you can approach is likely to be limited. This is why consulting an advisor is so important.
Your home itself can be a factor when lenders make their assessments. For instance, your property type, condition and property value will be assessed. This is so lenders can be confident that they’ll be able to recover the loan in the future.
You can get an accurate idea of whether you’ll qualify by speaking to a specialist. Not only will an advisor assess your circumstances, but can also guide you on whether or not a lifetime mortgage is a suitable option for you.
About the author
Martin is a senior mortgage advisor and has held a CeMAP qualification for over 15 years while also completing an MBA in Global Banking & Finance.