The Best Lifetime Mortgage – Guide, Advice & Tips

Are you keen to find out more about a lifetime mortgage? It’s a big step, and it’s normal to feel a bit unsure.

You’re not alone. Each month, over 7,000 people visit our website to find out about equity release.

In this guide, we’re going to explain:

•  The meaning of a lifetime mortgage
•  How a lifetime mortgage works
•  The good and not-so-good parts of a lifetime mortgage
•  Where you can find a lifetime mortgage
•  What happens when a lifetime mortgage ends

Thinking about money for your later years can be a bit tricky. But we’re here to make things simpler and help you understand lifetime mortgages.

What is the best type of equity release?

The two examples above suggest that both types of equity release schemes can become expensive to repay, but one is not always cheaper than the other. One advantage with an equity release lifetime mortgage is that the debt grows gradually over time, which may be why the lifetime mortgages are somewhat more popular than home reversion plans. And it could be why there are more lifetime mortgage providers around. 

What methods of equity release exist?

UK residents have the choice between two types of equity release loans called lifetime mortgages and home reversion plans. Both of these loans follow the repayment structure explained above, i.e. they are only repaid after death or moving into care. But how they increase the total debt owed is different. 

We have explained how a lifetime mortgage and home reversion equity release scheme work below with examples. If you do go on to apply for any of these loans, make sure you get advice beforehand and only consider lenders that are authorised and regulated by the Financial Conduct Authority. 

Home reversion plan explained with example

A home reversion plan is the lesser-used type of equity release plan. The reason for this may be because the total debt instantly grows significantly. They work by exchanging a loan today for a percentage of the homeowner’s property’s sale proceeds in the future (after dying or moving into care). The percentage of sale proceeds demanded by the lender dwarfs the percentage of equity they release from their home. 

For example, you might own a £160,000 home and decide you want to release 20% equity with a home reversion plan, equalling a £32,000 lump sum with no repayments required. However, when you die or move into care, the lender could be due 80% of the sale proceeds of your home. If the value of your home increased by 10% over time, an 80% repayment of the new property value would come to £140,800. This is a big repayment on your initial £32,000 loan. 

Lifetime mortgage explained with example

Lifetime mortgages do not pre-agree how much of the sale value of your home needs to be repaid. They work by charging the loan amount with interest that rolls up each month. What this means is that the interest repayments are not repaid by the homeowner either, so the debt just keeps growing bigger and bigger as time progresses. It is important to find one of the best lifetime mortgage providers with a low interest rate to mitigate how fast your debt grows. 

Take a look at this example of a lifetime mortgage to see how expensive these loans can also become. If you own a £200,000 home and want to release £65,000 equity as a lump sum loan on a 6.4% interest rate, you would owe in the region of £137,000 after just 12 years. Your debt has more than doubled after just over a decade of the loan. 

The pros of lifetime mortgages

Some of the main reasons to consider an equity release loan as a senior are:

1. You receive a tax-free cash lump sum
2. You do not make monthly repayments
3. You only repay after death or moving into care
4. You can continue living in your property
5. You can spend or invest the money however you like

Are lifetime mortgages fixed rate?

Lifetime mortgages usually apply a fixed interest rate. This means that the rate of interest added to your loan remains the same each month. However, the interest is compounding, which means it is calculated on both the principal loan amount and the amount of interest accumulated so far. This means even though the interest is fixed, the amount of interest that gets added to the total debt gets bigger each month. 

What is an equity release calculator?

An equity release calculator will help you uncover the full costs of a lifetime mortgage over different time periods. You enter the amount you want to borrow and the online tool will show you the costs of your loan over time. 

What are the best lifetime mortgage interest rates?

The best lifetime mortgage rates are between 2% and 5% at the time of writing and are subject to change. Although securing a good rate is a priority, it is not the only aspect of a lifetime mortgage you should consider. 

The best lifetime mortgage deals are based on personal needs. For example, someone who has plans to take out one of these loans but move to a smaller home in the future will need an agreement that includes downsizing protection. This is when you move to a less valuable home and need to pay off some of your loan in the process, but a downsizing clause in the agreement prevents the lender from issuing an early repayment charge. 

This is just one example of why you also need to receive equity release advice before taking out one of these plans. 

» TAKE ACTION NOW: Find out how much equity you could release

Who are the best lifetime mortgage providers?

Some of the most trusted lifetime mortgage providers are listed below. This is not an exhaustive list and you should always complete your own timely research or get assistance from an equity release broker. 

Pure Retirement

Pure Retirement only deals in equity release and they only deal with applications directly from independent financial advisers to ensure that all applicants have received adequate advice first. They are respected and have some of the best customer service ratings online. 

Nationwide

Nationwide is one of the limited number of banks offering lifetime mortgages in the UK. They offer free advice, a downsizing clause and can provide applicants with £1,000 cashback which may be used to engage an equity release lawyer as part of the process. 

LV

LV is best known for its low early repayment charges, making exiting your lifetime mortgage cheaper. They begin at a low 5% and drop to 3% after six years. And after ten years all early repayment costs are removed. 

More 2 Life

More 2 Life also offers 0% early repayment after ten years, but they are even more known for the flexibility of their plans. They come with downsizing protection and allow plan holders to add or remove people to their plan – when applicable – for a low-cost fee. 

One Family

Another equity release specialist company, One Family has good customer reviews, downsizing protection and equity release advice for a fixed fee rather than a commission on your loan. This can be cost-effective for people wanting to release a lot of equity. 

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What are the different types of lifetime mortgages?

There are some variations on the standard lifetime equity release mortgage. Three of the most popular that you may want to consider are:

1. Drawdown lifetime mortgage

A drawdown lifetime mortgage is the same as described above but it pays out the loan as a drawdown rather than a lump sum amount. The loan is paid out as an initial lump sum with the rest of the available money kept in a cash reserve with the lender. The first lump sum is subject to a fixed rate, but any further drawdown amounts may be subject to the same or a different fixed interest rate. 

Drawdown lifetime mortgages can be a good idea to avoid paying unnecessary interest on the whole loan and can be used to maintain eligibility for means-tested benefits. 

2. Flexible lifetime mortgage

A flexible lifetime mortgage was referenced earlier. It is the variation that allows homeowners to make voluntary repayments on the interest due. These could be full or partial repayments to keep the debt amount lower. This is a good way for taking out equity release while ensuring your estate beneficiaries still get most of your wealth when you die. 

3. Enhanced lifetime mortgage

How much money you could get from an equity release plan can be increased by using an enhanced lifetime mortgage. These variations are for people with a shorter life expectancy or just poorer health than average. They allow these people to potentially access more equity than otherwise would be possible. It will require a health questionnaire within the application process, and the lender could request medical records or a doctor’s report. 

Things to consider

Equity release will involve a home reversion or a lifetime mortgage, which is secured against your property and will reduce the value of your estate and impact funding long-term care. Our equity release partner, Age Partnership provides a personalised illustration to explain the full details. The money you release, plus the accrued interest is then repaid when you die or move into long-term care. Advice is required before proceeding with equity release and any existing mortgage must be repaid. Age Partnership provide initial advice for free and without obligation. Only if your case completes would Age Partnership’s advice fee of £1,895 be payable. Other lender and solicitor fees may apply.