Lifetime Mortgages
Learn about the benefits, risks, and costs of a lifetime mortgage – an option that lets you unlock tax-free cash from your home while keeping ownership and avoiding the hassle of moving.
What is a lifetime mortgage?
A lifetime mortgage is becoming a more popular way to free up cash in your property. If you’re 55 or older and have equity in your home, you could get tax-free cash without having to move—or even use the loan to buy a new property.
It’s a secured loan you typically only repay when you pass away or move into long-term care. Meanwhile, you still own your property outright and might even be able to protect some of its value to leave to your loved ones.
How does a lifetime mortgage work?
A lifetime mortgage could be suitable if you require funds but lack sufficient regular income to handle loan repayments. It allows you to access tax-free cash by securing a loan against the value of your home. The loan is typically settled by selling the property when you pass away or transition into long-term care.
After your plan, any remaining funds will be directed to your beneficiaries after repaying the loan and interest. You might have the option to ring-fence a portion of your property’s value to ensure an inheritance for your family. Alternatively, your family could retain ownership of the property by using some of your estate to settle the loan.
Flexibility
With a plethora of lenders and hundreds of plans available, you have the flexibility to choose between different options.
You can opt for a lump sum plan, where you receive a one-time payment, or a drawdown plan, allowing you to access the loan in increments.
Additionally, if you have certain medical conditions or lifestyle factors, you might qualify for enhanced equity release, which could mean accessing more cash or benefiting from lower interest rates.
Interest is applied to the amount you borrow
Typically, there are no monthly payments, and the interest accumulates on a compound basis, being added to the loan amount each month. However, you may qualify for an interest-only lifetime mortgage, enabling you to make payments to prevent interest from accruing.
While lifetime mortgage loans are typically secured against your primary residence, some lenders may offer equity release options for second homes or buy-to-let properties.
Lump Sum Lifetime Mortgages
A lump sum lifetime mortgage is a way to get tax-free cash quickly, even if you don’t have a regular income to make loan payments. You receive a one-time payment secured against your property as a loan.
The repayment happens when your property is sold after you pass away or move into long-term care.
This type of mortgage is popular if you need a large sum of cash upfront rather than regular payments.
Like most loans, interest is added to the amount you borrow each month on a compound basis, which means it accumulates over time. However, you can choose an interest-only lifetime mortgage where you make regular payments to keep the interest from piling up.
Drawdown Lifetime Mortgages
A drawdown lifetime mortgage offers added flexibility for those seeking to access equity in their home. It allows you to receive an initial lump sum and draw additional cash instalments over time.
The financial benefits of a drawdown lifetime mortgage are significant. It allows you to supplement your income during retirement with regular tax-free cash or withdraw funds as needed, providing a flexible solution to your financial needs.
A significant advantage of a drawdown arrangement is that interest accrues more slowly than a regular lump sum lifetime mortgage.
That’s because you’re only charged interest on the funds you withdraw, not the entire sum in your reserve.
Interest-only lifetime mortgage
With this type of mortgage, you commit to making monthly interest payments, usually at a fixed rate. If you pay the total interest and stay current with payments, the only amount due for repayment when the house is sold at the end of the plan is the loan itself.
Alternatively, you can pay a portion of the interest, reducing the total interest payable at the plan’s end.
Unlike a standard lifetime mortgage, where no payments are made, and interest accumulates over time through compound interest, an interest-only plan provides the option for ongoing payments.
After these plans, both the interest and the borrowed capital are repaid when the house is sold.
Certain interest-only plans offer flexible features, allowing you to halt voluntary interest payments at any point. From that juncture, interest accrues monthly on a compound basis and is added to the loan amount, similar to a regular lifetime mortgage.
Medically enhanced lifetime mortgage
Equity release mortgages can be enhanced based on your health and lifestyle factors, increasing the equity available to you. This process resembles how annuity providers offer impaired rates, with lenders’ underwriters assessing the maximum release based on your medical questionnaire.
Second home lifetime mortgage
Second home equity release presents various avenues to consider. Whether you’re eyeing a getaway retreat or seeking to bolster your finances, leveraging the equity in your second property can help turn those dreams into reality.
Equity release on a second home provides a tax-efficient way to access cash, whether it’s unlocking equity from a property you already own, using your primary residence to fund another property, or even releasing funds from a second home you’re purchasing.
Each option offers advantages, from providing a financial boost to facilitating the purchase of your ideal holiday retreat.
Buy-to-let lifetime mortgage
Buy-to-let equity release provides landlords with versatile options for accessing tax-free cash from their property investments.
Whether you’re looking to unlock equity from an existing buy-to-let property for various purposes or utilise your home’s equity to purchase a new one, Equity Release offers a secure and adaptable solution to your financial needs.
Additionally, it can bridge funding shortfalls for buy-to-let purchases without traditional mortgages.
Lifetime Mortgage Video
Watch the video below where ‘MoneymanTV’ talks about lifetime mortgages:
Drawbacks of a Lifetime Mortgage
While a lifetime mortgage can provide tax-free cash for individuals over 55, it’s crucial to consider its potential risks.
Interest accrues daily and is added to the loan amount each month, increasing the overall debt and potentially reducing the equity remaining in your home when the plan concludes unless you opt to make interest payments during the term.
Accessing equity from your home may diminish the inheritance you can leave. If you gift part of the released funds to your family, they might face inheritance tax liabilities in the future.
Additionally, early repayment of the loan could incur early repayment charges.
Moreover, borrowing through a lifetime mortgage might impact your eligibility for certain means-tested state benefits, which can be discussed during a consultation with a financial adviser.
What’s the difference between a lifetime mortgage and a home reversion plan?
Wondering about the distinction between a lifetime mortgage and a home reversion plan? Well, the main differences boil down to two key factors:
Home Ownership
When you opt for a lifetime mortgage, you still maintain full ownership of your home, retaining 100% ownership rights.
Conversely, with a home reversion plan, you’ll sell all or a part of your home to the equity release provider. Despite this, both options grant you the privilege of residing in your home until you pass away, decide to sell the property, or require permanent care.
Interest Payment Arrangements
With a lifetime mortgage, interest accumulates over time in a compound manner. This setup can lead to a rapid escalation in the total owed amount, as you pay interest not only on the principal loan but also on any already added interest.
In contrast, a home reversion plan offers a different approach. Here, you don’t have to worry about interest payments or repayments.
The provider includes the interest in the price they offer for the share of the property you sell to them. This means you can enjoy the benefit of living in your home without the burden of interest, rent-free throughout the arrangement.
Comparison Table
| | Home Reversion Plan | Lifetime Mortgage |
|---|---|---|
| You retain full ownership of your property. | No | Yes |
| The mortgage lender has a registered charge on your property. | N/A - You are selling part/all of your home. | Yes - The same as a residential mortgage. |
| What is the maximum loan amount? | Based on your age and your property value. | Based on your age and your property value. |
| Your eligibility is based on your income and expenditure? (affordability assessed) | No | No |
| Mandatory monthly payments are required. | No | No |
| Voluntary payments can be made. | Sometimes | Yes |
| Minimum age of applicants. | 60 years old. | 55 years old. |
| Maximum age of applicants. | No maximum age. | No maximum age. |
| You have the right to live in your property for the rest of your life. | Yes | Yes |
| Your interest rate is fixed. | N/A - You are selling part/all of your home. | Yes for the lifetime of your mortgage. |
| Move Home When You Want | No | Yes |
| Downsizing Protection | No | Yes |
| Significant Life Event Exemption | No | Yes |
Protection and Guarantees
Equity release is regulated by the Financial Conduct Authority (FCA), ensuring certain standards are met. Advisors must consider alternative funding options for clients.
Additionally, the Equity Release Council, the industry’s regulatory body, mandates certain guarantees for member providers:
- No Negative Equity Guarantee: You or your family won’t owe more than your property’s value to the lender.
- Lifetime Home Occupancy: You have the right to stay in your home for life.
- Flexibility to Sell: You can sell your home and move without penalties.
- Penalty-Free Partial Repayments: You can make partial repayments without penalties.
- Fixed or Capped Interest Rates: Your interest rates remain fixed for life or capped at a maximum level.
How much can you borrow?
The amount of money you can release depends on various factors, including the age of the youngest homeowner (who must be 55 or over), the value of your property, the amount of equity you have in the property, and your location.
The older you are, the more you can borrow, with borrowing levels usually ranging from 25% to 60% of the property’s value. Lenders also set a minimum loan amount, generally starting from £10,000. According to market statistics from the Equity Release Council, the average release amount for new customers opting for a drawdown lifetime mortgage was £124,735 in 2021.
Alternatives to lifetime mortgages
While a lifetime mortgage can provide a welcome cash injection, it’s not the right choice for everyone.
Alternative options worth considering include tapping into your savings, selling assets, accessing grants, checking your entitlement to benefits, remortgaging, or considering Retirement Interest-Only (RIO) mortgages. Other possibilities include downsizing to a smaller home, seeking support from family and friends, or renting out a spare room.
Each option has pros and cons, so weighing them carefully to find the best fit for your financial situation and lifestyle is essential.
Can you switch equity release?
If you’re already engaged with a lifetime mortgage, exploring the option to switch could be a wise move. There’s a chance you could secure a better deal, particularly if you’ve aged since taking out your existing plan.
Additionally, any increase in your property’s value or changes in your health status might qualify you for additional funds.
Moreover, fluctuations in interest rates could potentially result in substantial savings over the lifespan of your plan.
It’s worth investigating your options to ensure you’re making the most financially sound decision.
How much can you release?
You can usually release a minimum of £10,000, but the maximum amount varies based on several factors, such as your property’s value and your age.
Typically, the older you are, the more you can release.
Looking for a quote?
While we do not provide a quote or call-back service as our website is purely informational, we understand that some people do want an equity release quote.
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