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

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?

A lifetime mortgage is a loan secured on your home; you retain ownership. Interest that is not paid is added to the balance. The loan is usually settled when the last borrower dies or moves permanently into care, subject to the contract. Required or optional repayments vary by product. A home reversion plan is a sale of part or all of your home, usually below open-market value, in return for money and the right to remain under the plan’s occupancy terms. It is not a loan. The provider receives its agreed share when the home is sold.

Many lifetime mortgages allow interest to roll up without regular payments, but some require interest payments for a set period. Optional repayments, limits and any early-repayment charges depend on the contract.

Normal repayment is due when the final borrower dies or moves permanently into care, subject to the contract and other possible triggers.

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). 

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. 

Many lifetime mortgages allow interest to roll up without regular payments, but some require interest payments for a set period. Optional repayments, limits and any early-repayment charges depend on the contract.

The borrower or estate’s personal representatives arrange repayment. Sale is common, but other available funds can be used.

Early repayment may attract charges, subject to the product’s allowance, schedule and exemptions. It does not guarantee that the family will retain the home in all future circumstances.

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?

Most standard lifetime mortgages start at age 55, but some payment-term lifetime mortgages are available from 50 and require interest payments for an agreed period. Home-reversion minimum ages and all other eligibility rules depend on the provider. Check the youngest applicant’s age and the actual product criteria.

Eligibility depends on the product, age, property, credit circumstances and any required affordability assessment. Minimum property values and borrowing limits are lender-specific. An existing mortgage normally has to be cleared at completion, often using some of the released funds. Some products can be used as part of buying a new main home, subject to criteria and sufficient funds for the purchase.

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?

The maximum advance depends on age, property, product and underwriting. There is no universal 60% limit or guaranteed enhanced advance.

What are the benefits of a lifetime mortgage?

The benefits of an equity release lifetime mortgage are:

1. A loan secured on the home, with optional or required payments depending on the product.
2. Your equity release money is tax-free
3. You can use the lump sum on a wide variety of reasons
4. Remain in the property subject to occupancy and other contract conditions.

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. 

Illustration only: £65,000 at 6.4% interest compounded annually with no repayments would grow to about £137,000 after 12 years, excluding fees.

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?

Yes, some lifetime mortgages can help buy a new main home, with the mortgage secured on that home and the rest of the purchase price funded separately. This differs from spending proceeds on a second property or porting an existing plan; check lender criteria, costs and occupancy rules.

Porting an existing lifetime mortgage may also be possible if the new property is accepted, with any required partial repayment and fees.

Can I give my lump sum to my family?

Gifting released money may be permitted, but check provider rules, your own financial needs, benefits, care-funding and tax consequences, and the recipient’s mortgage requirements.

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.

For a plan meeting the relevant Equity Release Council standards, the right to remain depends on keeping the property as your main residence and meeting the contract terms. A no-negative-equity guarantee limits repayment to the net sale proceeds when its conditions are met; it does not stop the balance growing or make the product risk-free.

Can you pay off a lifetime mortgage?

Early-repayment charges depend on the contract, timing, allowances and exemptions. Request a current redemption illustration.

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

A suitable lifetime mortgage may help purchase a new main home, or proceeds may be used for another permitted property purpose. Each route has different eligibility, occupancy, cost and tax implications.

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!