Understanding Lifetime Mortgages | A Complete Guide

More than ever, UK homeowners over 55 seek financial solutions to help cover their futures.

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More than ever, UK homeowners over 55 seek financial solutions to help cover their futures. Lifetime mortgages continue to rise as one of the most popular options to quickly unlock capital from their homes and plan for various expenses.

However, many prospective borrowers don’t understand a lifetime mortgage’s ins, outs, and implications, leaving them wondering if this is the right equity release plan. This guide will cover everything you need to know about a lifetime mortgage, including how it works, its advantages and disadvantages, and what you need to know.

Let’s dive into the guide by defining a lifetime mortgage.

What is a Lifetime Mortgage?

A lifetime mortgage is a type of equity release scheme that can provide a lump sum of cash or monthly instalments in exchange for a percentage of the value of your home. In other words, it’s a loan secured against how much your home is worth, allowing homeowners to unlock potentially needed capital now rather than having to sell the property.

Lifetime mortgages are fast becoming a popular option for UK residents worried about the rising costs of living upon retirement. The equity release plan allows quick access to funds that do not require repayment until the property gets sold, usually after death or moving into long-term care.

Why the name ‘lifetime mortgage’? Because the equity release plan can run your entire life without needing repayment. So how does the loan work where there are no monthly payments required?

How Does a Lifetime Mortgage Work?

Lifetime mortgages offer a tax-free cash sum that can get spent any way the plan holder pleases. An interested homeowner will apply for the scheme, borrowing money against the value of their home.

Like any other loan, interest will get charged on the amount borrowed. The figure is mainly dependent on factors, including how much you want to borrow, your age, and the value of your property.

Interest rates will average between 4% and 7%, with the available equity release usually between £10,000 to £100,000. However, this can vary depending on your circumstances.

So let’s give a breakdown of how a lifetime mortgage works from start to finish.

  • A homeowner will apply for a lifetime mortgage through a broker or provider.
  • They’ll outline how much they want to borrow.
  • The provider will process your application and offer terms with an interest rate.
  • The borrower will receive cash in an agreed lump sum or monthly instalments if accepted.
  • Compounding interest will apply to the repayment amount every month.
  • There is no need to repay the loan until you pass away or move into long-term care.
  • After one of the events mentioned above, your house will get sold to cover the outstanding debt.

Lifetime mortgages are relatively simple in concept and straightforward to inquire about, with providers and brokers ready to answer every query. But like every financial product, this equity release scheme holds its advantages and disadvantages, which we’ll discuss further in this guide.

But first, let’s address one of the most frequently asked questions about lifetime mortgages. How are they different from regular mortgages?

What’s the Difference Between Lifetime Mortgages and Regular Mortgages?

The significant difference between lifetime mortgages and regular ones is that no repayments are required until the termination of the contract, usually upon death or moving into long-term care.

Although interest continues to compound, repayment of the loan only comes when your property gets sold. So now we’ve covered how a lifetime mortgage works. What types of this equity release plan are available to prospective borrowers?

What Types of Lifetime Mortgages Are There?

We compare plans from the leading equity release providers

Brokers and providers generally list several lifetime mortgages to suit borrowers’ circumstances. You can see some of the most popular types of plans below.

Roll-Up Lifetime Mortgage

The ‘roll-up’ lifetime mortgage is arguably the most popular choice of the equity release plan. Borrowers will get a lump sum of cash without making any monthly repayments, though the interest continues to accrue.

The outstanding amount owed gets paid upon the sale of your home, usually upon death or transition to long-term care.

Drawdown Lifetime Mortgage

Sometimes borrowers prefer not to receive cash all at once and wish to access their money only when they need the funds. Drawdown lifetime mortgages give them the flexibility to manage some cash when you might need it most, offering a reserve for emergencies.

Borrowers can get funds from their drawdown reserve when needed and will only get charged interest on the amount they’ve taken out. It’s also an excellent option to avoid interest continually compounding on the lump sum.

You can read more about drawdown lifetime mortgages here.

Flexible Lifetime Mortgage

Flexible lifetime mortgages offer what it says in the name and give borrowers more resilience towards repaying the amount owed. You’ll be able to make voluntary repayments throughout the contract to bring down the final amount owed.

Interest-Only Lifetime Mortgage

Interest-only lifetime mortgages allow the borrower to repay some of the interest each month on the amount borrowed. Those repayments mean that the amount owed at the end of the contract could be significantly less than rolling interest over the years.

Enhanced Lifetime Mortgage

Enhanced lifetime mortgages get offered to prospective borrowers with specified medical conditions. If you qualify, you may be able to unlock more cash from your home and get better rates for the plan.

You can learn more about enhanced lifetime mortgages here.

Why are Lifetime Mortgages Popular Choices?

Many older UK residents find that too much time has elapsed to consider funding care in later life. That’s why over-55s with homes seek options to acquire significant cash to ensure they are financially secure for the future.

Lifetime mortgages offer a quick influx of cash against their primary asset – their homes. The fact that the borrowers don’t have to pay a penny in repayments also is an attractive option, ensuring that taxes or interest won’t eat away at the amount received.

You’ll retain ownership of your home, not have to make repayments, continue to live in your property, and have a pot of cash to use as you please. These factors alone solve the general financial concerns of ageing persons.

Lifetime mortgages allow you to retain your quality of life until you pass or move into long-term care. The outstanding debt balance gets addressed by selling your property. But of course, these plans have risks and complications, which we’ll outline further in the article.

First, let’s see how taking out one of these equity release plans can benefit borrowers, helping secure their financial futures. But what are the key benefits of this type of loan over other financial products?

What are the Benefits of a Lifetime Mortgage?

Find below five reasons why a lifetime mortgage can benefit a borrower.

1. You’ll still own your home and won’t have to leave.

Despite your provider giving you and your partner cash for a stake in your home, the borrowers will remain the sole owners of the property. You’ll never have to leave during the contract and will only sell after the last person passes away or goes into care.

2. You can leave an inheritance for your family.

Taking a lump sum of cash offers some future financial protection and allows planning for things such as inheritance. After you pass or move to long-term care, your home will get sold, and the remaining funds will pay off your balance on the lifetime mortgage.

Any money left over will go to your family as an inheritance. However, if leaving money for your family is a primary concern, it’s worth getting in touch with a lifetime mortgage specialist to understand your options.

3. There’s nothing to stop you from moving home.

There’s a mutual understanding between provider and borrower that circumstances may change. A lifetime mortgage offers the flexibility to move home as long as the lending criteria get met with the new property.

4. You’ll never owe more than the value of your home.

Almost all lifetime mortgages come with a no negative equity guarantee. That term means that you’ll never owe more in repayments than the value of your home, ensuring that families won’t be in debt after passing.

Prospective borrowers shoe note that its possible interest can accrue past your property’s value. However, no matter how much the home sells for, that will always be the amount repayable should the outstanding balance reach that level.

Even if the property decreases in value and doesn’t get as much in the sale as initially thought, the remaining debt will get written off.

5. Use your money however you wish.

Finally, the core advantage of a lifetime mortgage is receiving a tax-free lump sum to spend however you wish. You can make home improvements, boost income, help your family with expenses, pay off your mortgage, or treat yourself.

So, how much would it cost if you were interested in applying for a lifetime mortgage?

How Much Will a Lifetime Mortgage Application Cost?

There are costs to consider when applying for a lifetime mortgage, as there are intermediaries that help process your desired plan. Fees will vary on the provider, and some applications may be more complex than others.

However, below are some of the fees you can expect to pay to apply for a lifetime mortgage:

  • Application fees
  • Legal fees
  • Cost of home valuation
  • Lender’s fees for the plan
  • Completion fee
  • Building insurance

During the contract, other fees may apply if you wish to repay your lifetime mortgage early without defined parameters. All costs vary depending on how much you want to borrow and the lender’s policies.

So how much can you borrow in a lifetime mortgage?

How Much Can I Borrow?

Most lenders will offer lifetime mortgages ranging between £10,000 to £100,000. However, the amount you can borrow depends on the property’s value, meaning you could take a more significant equity release loan.

You will need a home valuation to know precisely the maximum amount you can take out, which usually gets enquired by those getting lifetime mortgages later in life. The final amount you can borrow depends on your age and the property value.

Now, how does the lender determine interest on the amount loaned?

How Much Interest Will I Pay?

Interest rates for your lifetime mortgage will largely depend on your circumstances and the amount you want to borrow. Typically, you’ll find that interest rates will generally range between 4% and 7%, but again, they can vary.

Lifetime mortgage specialists will use your information to find the best deal for you and break down the competition to find the most beneficial product. You can use the lifetime mortgage calculator here to determine the rates you’ll get offered according to your needs.

Otherwise, you can discover more about up-to-date lifetime mortgage rates here.

So now we’ve covered the basis, types, critical information, and benefits of lifetime mortgages. What risks are associated with taking out the equity release scheme, and what should prospective borrowers know before applying?

What are the Risks of a Lifetime Mortgage?

Discover four considerable risks of taking out a lifetime mortgage below.

1. The debt could significantly affect inheritance.

If you plan on leaving an inheritance for your loved ones, taking out any equity release plan or lifetime mortgage can affect what’s left over. Sometimes, the amount owed from the rolling interest will consume the profits from your home’s sale, leaving little or nothing to pass to the family.

Lifetime mortgage specialists can give more information about inheritance and lifetime mortgages, should leaving something behind be on your list of priorities.

2. Lifetime mortgages can affect your benefits and tax status.

Getting such a significant injection of cash into your estate from a lifetime mortgage may mean you can no longer receive certain state benefits. The sum could also affect your tax position, but it is tax-free.

Seek more information from a lifetime mortgage expert to understand how the equity release plan could affect your benefits and tax status.

3. Compounding interest can make the amount owed vastly more than the borrowed sum.

We’ve touched on the notion that compounding interest can significantly accrue. Again, the final amount could be vastly more than what you initially borrowed. The primary asset of your home may get absorbed by the lender after passing or admission to care.

It’s worth considering interest-only lifetime mortgages to offset the final amount if you wish some funds from your home sale to pass to loved ones.

4. You won’t be able to repay early without hefty fees.

Finally, early repayment fees are one of the leading concerns of prospective borrowers. A lifetime mortgage is a commitment that spans the rest of your life, meaning that lenders calculate rates based on those terms.

Should circumstances change and you want to pay off the lifetime mortgage, it could come as a hefty cost to the lender. Therefore, those expensive charges will get passed on to the borrower, making the equity release plan a very costly affair.

Early repayment of your plan is complicated, and prospective borrowers should consider their financial futures before committing to a lifetime mortgage.

So weighing up the advantages and disadvantages may leave one question, should you take out a lifetime mortgage?

Should I Take Out a Lifetime Mortgage?

Like all financial products, there should be careful consideration before committing to a lifetime mortgage. However, the equity release scheme can be an elegant financial solution for future planning or to meet significant upcoming expenses.

Lifetime mortgage lenders get regulated by the Equity Release Council (ERC) and overseen by the Financial Conduct Authority (FCA). That notion means they are safe and provide some security for the borrower. But engaging with a specialist to understand whether this product is the right option comes with a high recommendation.

So is a lifetime mortgage a good idea for you? First, to be eligible, you must:

  • Be a UK resident aged 55 or over.
  • Be a homeowner coming to the end of your mortgage.
  • Own a home that’s at least £70,000 in value

There could be a variety of circumstances that prompt you to consider a lifetime mortgage. Many options may suit your position well, and the equity release scheme could benefit your financial future.

Get in touch with an expert to better understand how a lifetime mortgage could play to your advantage. Consider asking your specialist:

  • What happens to the lifetime mortgage should you pass away sooner or later?
  • How will the plan affect my state benefits?
  • What if I want to repay some of my loans early?
  • What will get left for inheritance under the plan’s terms?
  • Can you outline the process of taking a lifetime mortgage?

How Can I Take Out a Lifetime Mortgage?

First, weighing up options and finding the best deal aligned with your financial circumstances and expectations is imperative. You can learn more about taking out a lifetime mortgage by viewing the leading providers and rates for 2023.

Lifetime mortgage specialists can guide you through the process, where a prospective borrower should request a personalised illustration of how the equity release plan will work for you.