What is a lifetime mortgage?
A lifetime mortgage is an equity release scheme that allows you to access some of the wealth you have tied up in your home. You take out a mortgage based on the value of your house, receive a cash payment and carry on living in your home until you die or move out.
How does a lifetime mortgage work?
You can take either a lump sum or smaller regular payments. You receive the money tax-free and can use it for whatever purpose you wish. You could, for example, use the money for a medical expense or to pay off debt or for a dream holiday.
Suppose you don’t need a large lump sum. In that case, a flexible or drawdown facility – where you take regular or occasional small amounts, perhaps to top up your income, or for particular circumstances – has the advantage that you only pay interest on the money you actually need.
Rates may be fixed for the life of the loan or variable. However, if they are variable, the Equity Release Council insists its members must put a cap on this rate to prevent rates spiralling.
Interest on lifetime mortgages usually rolls up (compound interest) and is repaid when the home is sold – typically when you die or move into a care home. However, the debt can quickly spiral as the interest accrues and you pay interest on interest without any of the loan being repaid. It’s always essential to check that your provider is a member of the Equity Release Council and has a ‘no negative equity guarantee’, which ensures that your debt will never exceed the value of your home.
Some plans allow you to make regular or ad hoc repayments to help reduce costs.
With a lifetime mortgage you will still also be responsible for keeping your property in good condition.
How much can I borrow?
The older you are, the more money you can borrow. Most providers will offer a fixed percentage based on your age. The older you are at the time of application, the higher the amount you will be able to borrow.
The loan size will also depend on the value of your property and sometimes your health. You may be able to borrow more money if you have health conditions such as high blood pressure or diabetes.
» COMPARE: Lifetime mortgage deals
How do I get a lifetime mortgage?
There are many providers, and because of the relative complexity of these products and the variety of factors involved, all borrowers need specialist advice from an adviser with an equity release qualification. If they think equity release is suitable, they will be able to recommend a plan. You will also need to get legal advice too.
» MORE: How to get equity release advice
The costs involved in obtaining a lifetime mortgage
Unfortunately, there are lots of costs involved in setting up a lifetime mortgage. This often starts with fees for advice from an adviser with an equity release qualification, although some organisations provide free advice, including debt charities like Step Change. You will need to pay for independent legal advice as well.
You may also need to pay for an arrangement fee for a lifetime mortgage as you would with a traditional mortgage and will need to pay for a valuation of your property.
These costs vary substantially but could add up to a total of £3,000.
Examples of the amount owed when borrowing £50,000 and opting to roll up the interest:
- At an interest rate of 4%, the total owed would be £60,833 after five years, £74,013 after 10 years, and £93,423 after 15 years.
- At an interest rate of 5%, the total owed would be £63,614 after five years, £81,522 after 10 years and £104,046 after 15 years.
- At an interest rate of 6%, the total owed would be £66,911 after five years, £89,544 after 10 years and £119,831 after 15 years.
If you have an outstanding mortgage on your residence when you take out an equity release plan, you’ll have to use part of the money to pay off the existing balance.
Pros and cons of lifetime mortgages
- Lifetime mortgages allow you to withdraw some of the wealth stored in your home without having to move.
- You can withdraw tax-free cash to cover major expenses such as private medical care, improvements to your home or simply a more comfortable retirement.
- Lifetime mortgages are regulated by the Financial Conduct Authority (FCA), an official body designed to protect your financial interests. You can complain to the Financial Ombudsman Service if you’re unhappy with the service you receive from an equity release provider.
- Having a large amount of cash in your bank account could impact your eligibility for pension credit, savings credit, council tax discount or other means-tested state benefits.
- A lifetime mortgage will increase the size of your debt, and you’ll have to pay interest on that debt. If you choose to roll up the interest payments until the scheme ends, your beneficiaries could be liable for a significant interest bill on top of the loan amount.
- You will need to seek financial and legal advice and pay a variety of set-up charges.
- House prices may be lower than they are now when the loan has to be repaid.
- Taking out a lifetime mortgage will reduce the amount your beneficiaries receive when you die.
- You may face hefty penalties if you decide to repay the loan early.
- Although most lifetime mortgages are portable, meaning you can transfer them to another home, in reality, you may face difficulties if the house you wish to move to is worth less than your current residence.
» MORE: Is equity release right for you?
Alternatives to lifetime mortgages
Traditional mortgages may offer a cheaper means of releasing cash from your home, although these are subject to age restrictions and older borrowers often struggle. Learn how to get a mortgage later in life.
You could downsize, sell your current home and move to a cheaper alternative, releasing some of the current equity in your home.
» MORE: Alternatives to equity release
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Anthony is a BBC-trained journalist. He has worked in financial services and specialised in investments for over 20 years, writing for various wealth managers and leading news titles. Read more