The Best Lifetime Mortgage – Guide, Advice & Tips
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Why should you consider a lifetime mortgage and which companies are the best lifetime mortgage providers right now? This detailed guide will put lifetime mortgages under the microscope before taking a look at some of the best lifetime mortgage providers and some interesting lifetime mortgage variations.
If you want to use equity release to receive a lump sum loan with no monthly repayments, you need to hear this first.
What is equity release and how does it work?
Equity release is a method of borrowing available to senior homeowners. Because it is only available to older homeowners, it is mostly used as a way to fund retirement. This is possible because equity release loans do not demand any monthly repayments.
The equity release loan does not get repaid until the homeowner dies or moves into long-term care. Their home will then be sold to raise cash and pay back the loan. If the homeowner has died, estate beneficiaries may be allowed to pay cash into the estate to clear the debt, or buy the property on the market themselves. However, this may mean paying Stamp Duty on the purchase.
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Who is eligible for equity release?
Equity release schemes are only available to people over the age of 55, and you may need to be younger than a certain age to apply as well (usually < 85 years old). These age requirements apply to all people listed on the equity release plan, which will usually be all homeowners.
The property you release equity from must be your main residence on a standard equity release loan, and that residence might have to meet a minimum valuation set by the individual lender, often around £70,000 to £80,000 at the time of writing.
This will make you eligible to apply, but the lender will then complete its own checks on your property, using the services of surveyors and possibly other industry professionals. They will want to check details about your property to ensure it is built correctly and not at serious risk of decreasing in value, such as risks of flooding etc.
Why do seniors use equity release schemes?
Senior homeowners consider using equity release loans for a wide variety of reasons. But the most common reasons for using equity release is to fund retirement and reduce the financial worry in later life. This may simply be paying for general living expenses over a long period, or it could be for home improvements, medical care, holidays, investments and much more.
Some people take out an equity release plan and then give some or all of the money to their children to help them buy a property, get a better mortgage deal or start a business. There can be inheritance tax implications when you give away money and die within seven years of the transaction.
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.
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.
Can you pay off a lifetime mortgage?
You can pay off your lifetime mortgage early if desired, but doing so may incur a hefty early repayment charge. These fees are high with most lenders, but some home reversion and lifetime mortgage providers will reduce their early repayment fees the longer you have the equity release plan with some reducing them all the way to zero after ten years, such as LV and More 2 Life. Albeit by this time your loan will have grown significantly anyway.
You can also make partial repayments during your lifetime mortgage to keep the total owed in the end lower, and to ensure more of your wealth gets passed to family or friends. This requires a special type of lifetime mortgage, which we discuss towards the end of this guide.
The pros of lifetime mortgages
Some of the main reasons to consider an equity release loan as a senior are:
- You receive a tax-free cash lump sum
- You do not make monthly repayments
- You only repay after death or moving into care
- You can continue living in your property
- You can spend or invest the money however you like
What are the pitfalls of a lifetime mortgage?
Some of the pitfalls of a lifetime mortgage are:
- They can become exceptionally expensive to repay
- Taking a large lump sum could cease eligibility to receive means-tested benefits
- Your future plans may be disrupted without the right agreement, such as moving home
Points two and three above can be avoided or any issues mitigated by getting the right independent financial advice beforehand. You must get equity release advice from a company or professional who is authorised and regulated by the Financial Conduct Authority before making an application.
What is the maximum age for a lifetime mortgage?
Many lifetime mortgages and home reversion plans are available without maximum age restrictions. However, some lenders like Nationwide Bank do impose a maximum age limit to their equity release loans.
The maximum age requirement when in place is usually younger than 85 years old. Just like how both homeowners need to meet the minimum age requirement at the time of application, both applicants must meet any maximum age limit set by the lender.
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.
Do banks do a lifetime mortgage?
Lifetime mortgages are rarely offered by high-street banks, with some exceptions. They are mostly offered by companies that only offer equity release products, or by companies that offer equity release alongside insurance, investments and other loans.
You may see a lifetime mortgage advertised by a bank, but that doesn’t mean the bank is the provider of that loan directly. They could be attracting interest and then sending customers to partnered lifetime mortgage providers to complete the credit agreement.
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.
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 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 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 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.
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 of your loan. This can be cost-effective for people wanting to release a lot of equity.
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:
- 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.
- 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 but ensuring your estate beneficiaries still get most of your wealth when you die.
- 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.
What is the Equity Release Council?
A group called the Equity Release Council was formed to increase the standards in the equity release industry and overturn a stained reputation. The council invites lenders to become members and abide by a long list of rules. Even though the rules are mainly there to benefit homeowners and provide them with additional protection, lenders join and follow these rules because they know it makes their equity release schemes more attractive to the homeowners.
The negative equity guarantee is one of the most talked about rules made by the council.
What is the negative equity guarantee?
The negative equity guarantee is one of the rules made by the council and it must be obeyed by all lenders. It states that a lender cannot chase unpaid lifetime mortgage debt that has been caused by a property selling for less than the value of their debt
This could be the case when the lifetime mortgage debt has grown over a longer than normal period of time or when the property value decreases – or both simultaneously. Whenever this happens, the lender can only recover money from the property sale. They cannot request money from the homeowner if they are still alive, or their estate (beneficiaries) if they have passed away.
The negative equity guarantee is one of the best additional assurances when using an Equity Release Council member. And to boot, all members must be authorised and regulated by the Financial Conduct Authority, so you know they are not scam lenders!
Does a lifetime mortgage stop your state pension?
No, receiving a lump sum will not stop you from receiving all of your state pension, but it could have an impact on any Pension Credits you may receive.
Where to get equity release advice?
If a lifetime mortgage sounds like a good way to fund your retirement then you first need to engage with a financial adviser. Don’t just use any advice company but use one that specialises in equity release because it is a complex topic that deserves specialist attention. You can read more about the next step in your equity release journey here.