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Can I Use a Lifetime Mortgage to Buy a House? – Guide & Advice

Using A Lifetime Mortgage To Buy A House

For free and impartial money advice and guidance, visit MoneyHelper, to help you make the most of your money.

Can I use a lifetime mortgage to buy a house? A lifetime mortgage is mostly used to access a lump sum that makes later life and retirement more comfortable. So can it really be used to buy a new property? 

We discuss the key details about buying a property with a lifetime mortgage loan, right here! 

What is equity release and lifetime mortgages?

Equity release is one method of releasing equity from your home as a loan, but it is only available to senior homeowners. There are two options when wanting to do equity release, either taking out a lifetime mortgage or home reversion plan, which we will revisit shortly. 

Both equity release products allow the homeowner to borrow some of their equity and not have to make monthly repayments on the debt. This is what makes equity release so unique. 

The homeowner only has to repay the loan in one single payment if they move into long-term care or when they pass away, in which it will be dealt with through their estate. 

Of course, the homeowner may not have the cash to repay the loan in full at once, which is why the debt is repaid by selling their property and using some or all of the money raised from the property sale to pay off the lender

Lifetime mortgages are the most common way of completing equity release in the UK – and they are the most widely available. You should only consider any equity release scheme from a lender that is authorised and regulated by the Financial Conduct Authority (FCA). 

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How does a lifetime mortgage work?

A standard lifetime mortgage works by offering the senior homeowner – or homeowners – a loan equal to a certain percentage of their home equity based on details about the property and the applicant’s age. 

The equity release company applies a fixed interest rate to the loan. The loan nor the interest need to be repaid each month. Instead, the interest simply rolls up and keeps getting added to the growing total owed. So the longer time goes on without repaying, the bigger the eventual debt will become. 

Once the homeowner dies or moves into care it is time to pay off the loan in full. They or their estate beneficiaries will need to help organise the house sale and allow the lender to recover the debt from the sale proceeds. Any remaining money will be the homeowner’s to keep or put back into the value of the estate they have left behind. 

You could try and pay off the loan early so you and your family can continue to own the property no matter what happens, but this will incur a hefty early repayment charge in most cases. 

Types of lifetime mortgages

The above is how a standard lifetime mortgage works, but there are some slight variations of these loans. Here are three common examples:

  1. Drawdown lifetime mortgage – exactly as described above but the homeowner receives a drawdown facility to access their loan, rather than a lump-sum payment. 
  2. Flexible lifetime mortgage – as standard but with the option of making voluntary interest repayments to stop the debt from growing exponentially over time. 
  3. Enhanced lifetime mortgages – used by people with poor health and reduced life expectancies so they can access more equity than normal. Often used to improve the quality of later life with private healthcare and treatments. 

What is the criteria for a lifetime mortgage?

To be able to apply for a lifetime mortgage the youngest homeowner must be at least 55 years old. In some cases, the applicant(s) must be younger than a certain age as well, often younger than 85. 

You can only take one of these loans against your main residence. So you will not be able to do so on a second home or a rental investment. The value of your home must be above a certain threshold, which is around £80,000 with most lenders. And the property must have no outstanding debts attached to it, and that includes a residential mortgage! 

This will allow you to apply for the lifetime mortgage, but your application can still be rejected based on things the lender uncovers about your house (using a surveyor). For example, they may discover your property is in a flood risk area. 

What is the maximum you can borrow on a lifetime mortgage?

Most lifetime mortgages will allow the homeowner to borrow a maximum of 60% of their equity in a best-case scenario, which means most people can borrow less than this. How much equity you can borrow will depend on your property value, age and the lender. If you need more than 60% of your equity you could see if you qualify for an enhanced lifetime mortgage instead. 

What are the benefits of a lifetime mortgage?

The benefits of an equity release lifetime mortgage are:

  1. You receive a lump sum loan amount with ZERO monthly repayments
  2. Your equity release money is tax-free
  3. You can use the lump sum on a wide variety of reasons
  4. You continue living at your property as usual

What are the pitfalls of a lifetime mortgage?

The major pitfall of a lifetime mortgage is not understanding how much it can cost in the long run, which can easily be avoided by choosing a respected equity release advice service. This is necessary before making an application. 

Here is an example to give you an idea of how much a lifetime mortgage can end up costing. If you were to take out a lifetime mortgage worth £65,000 as a lump sum and keep the mortgage for 12 years on a 6.4% interest rate before moving into long-term care, you would owe around £137,000 from your property sale. 

This significant cost eats into the value of your estate and what you planned to pass on to loved ones. 

Why do people take out a lifetime mortgage?

The most common reason for taking out a lifetime mortgage is to improve the quality of life in retirement. This could simply mean paying for ongoing expenses without having to count the pennies as closely, or it could mean private medical care, home improvements and round-the-world cruises. 

Can I buy a home with a lifetime mortgage?

Lifetime mortgages may or may not be used to buy property. If you want to use some of the money to buy a second property or investment property this is allowed. But if you wanted to buy a new property to live in yourself, this would not be possible because the lifetime mortgage debt becomes payable as soon as you stop living in your current residence. 

There may be times when you can buy a new property and take your lifetime mortgage with you, but this could trigger numerous fees depending on the details. 

Can I give my lump sum to my family?

You can give some or all of the loan to a family member. This is often done to help family members buy their first home or put down a bigger deposit to secure a better mortgage. So a lifetime mortgage can be used to help someone else buy property too. 

However, you need to be aware of any inheritance tax implications of paying financial gifts to others. These sorts of payments to other people can be subject to inheritance tax if they were made within seven years of your death. 

Lifetime mortgages and the negative equity guarantee

The Equity Release Council is a membership body inviting lenders to sign up and follow the group’s rules and guidelines. This is beneficial to the lender because it makes their schemes more appealing to the general public.

And why is this? It is because most of the rules are in place to give the homeowners additional protection, such as the negative equity guarantee. This is a guarantee that the lender will not chase debts that are not repaid by the sale of the property. So if the property sale money doesn’t cover everything, there is nothing to worry about. All members must already be regulated by the Financial Conduct Authority too! 

Can you pay off a lifetime mortgage?

A lifetime mortgage can be paid off early but will incur early repayment charges. Many lenders charge extortionate early repayment fees, whereas others lower them after a decade when the debt has already grown significantly. 

Can I buy a house with a lifetime mortgage? (Quick recap!)

Buying a house with a lifetime mortgage is possible in some situations, including buying a holiday home or rental investments. It’s also possible to use the money to help a loved one buy a home, but there could be inheritance tax implications on the financial gift given. 

Read other lifetime mortgage and equity release guides!

MoneyNerd has more in store for those contemplating equity release. In fact, we have over 100 new equity release guides available on our site for free right now!