Lifetime mortgages

What’s a lifetime mortgage?

It’s a type of equity release scheme where you borrow money secured against your home.

You don’t have to make any repayments. Instead, the loan amount and the interest accumulated will be paid off when your home is sold - typically when you die or go into long-term care.

You still retain ownership of your house with a lifetime mortgage.

How does a lifetime mortgage work?

Lifetime mortgages allow you to borrow tax-free money secured against your home to spend however you like - whether that’s to help your children buy their first property, make home improvements, or to use the cash as a way to supplement your retirement income.

Lifetime mortgages allow you to borrow tax-free money secured against your home to spend however you like. It could be used to help your children buy their first property, make home improvements, or to supplement your retirement income. 

You can receive your money either as a lump sum, or as a series of payments and there’s nothing to repay until you die or move into long-term care. 

You borrow a percentage of your property, usually between 20% to 50%, depending on your age. The older you are, the more you can normally borrow.

Lifetime mortgages are usually only available to homeowners aged 55 or over.

Choosing a provider that’s approved by the Equity Release Council will give you a ‘no negative equity guarantee’. This means your estate won’t end up owing more on the loan than your home’s worth.

Lifetime mortgages and inheritance

An ‘inheritance protection’ option allows you to protect a percentage of your home’s worth to pass on to your beneficiaries when you die. This option will reduce the total amount you can borrow, though.

Some lifetime mortgages offer the flexibility to repay some or all of the interest and the original loan. By reducing the amount you owe, you could leave more of an inheritance for your family

Moving to a new house with a lifetime mortgage

If you want to move home, you can normally transfer your lifetime mortgage to the new property, as long as it meets your lender’s criteria.

What are the different types of lifetime mortgage?

If you’re considering a lifetime mortgage, it’s important to choose the right one for you. There are a few different types, including:

Lump sum lifetime mortgage

As the name suggests, these types of lifetime mortgage pays out in one lump sum. They’re useful if you want access to a large amount of money in one go.

However, interest accumulates quicker compared to an interest-only or income lifetime mortgage.

Income (or drawdown) lifetime mortgage

An income lifetime mortgage can be used to top up your retirement fund. You’ll receive a monthly payment into your bank account. This is classed as a loan, so it’s tax-free.

Importantly, you only pay interest on the cash you take out, not on the amount that’s still in the reserve. With less to pay in interest, you could leave more of an inheritance for your family.

Flexible lifetime mortgage with voluntary repayments

This type of lifetime mortgage gives you the flexibility to make voluntary repayments to reduce the total amount you owe, without early repayment penalty charges. 

The amount you can repay each year is usually capped at 10% to 15% of the amount you borrowed. You can make these payments as and when your financial circumstances allow. 

Voluntary repayments like this can prevent interest from piling up and could even help pay off the balance of your loan.

Enhanced lifetime mortgage

If you suffer from ill health or a condition that affects your life expectancy, you may be able to take out an enhanced lifetime mortgage (also known as an impaired lifetime mortgage). 

You'll need to fill out a health questionnaire and, depending on the lender’s criteria you could receive might be a larger lump sum or a lower rate of interest.

Interest-only lifetime mortgage

This type of lifetime mortgage allows you to make interest repayments every month. 

You can select your payment amount, but if you repay the interest in full every month, you will maintain a constant mortgage balance. 

This means that, when the mortgage ends, there will only be the amount you initially borrowed left to repay, meaning you’ll have more to pass on as an inheritance.

Am I eligible for a lifetime mortgage?

• You must be aged 55 or over
• Your home needs to be in good condition and worth minimum value requirement This is normally £70,000, but for certain properties, such as flats and maisonettes, the minimum value is £100,000
• You need to apply for a minimum loan amount, normally £10,000
• You should have no mortgage - or just a small amount left to pay on your home

What’s the difference between equity release and a lifetime mortgage?

A lifetime mortgage is one of two types of equity release plans.

The other is a ‘home reversion scheme’, where you sell all or part of your home to the lender for less than the market value, and receive a tax-free lump sum or regular income in return. You continue to live in your home as a tenant, rent-free, for the rest of your life or until you move into long-term care.

What are the disadvantages of a lifetime mortgage?

There are some drawbacks to lifetime mortgages, so you should always speak to a financial adviser or a member of the Equity Release Council to help you decide if it’s the best option for you. Things you'll want to look out for include:

• If you make no repayments, the amount you owe will quickly increase. That’s because interest is added to the amount you initially borrowed, as well as on any interest already accrued. It’s a method of charging interest known as compound interest
• It can mean there'll be less or even nothing to leave as an inheritance when it comes to selling your home to pay off the loan
• As well as paying interest, there are other charges associated with setting up a lifetime mortgage. These may include arrangement fees, solicitors’ fees and fees for a mortgage adviser 
• An Early Repayment Charge can apply if you want to repay all or a large part of the loan back early
• This kind of equity release could mean you lose your eligibility for means-tested benefits such as pension credit, Universal Credit and council tax reduction and may also affect your tax position
• If you give a gift of money from your lifetime mortgage, the recipients may be liable to pay inheritance tax in the future