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What Is an Enhanced Lifetime Mortgage? In-Depth Overview

lifetime mortgage enhanced

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

What is an enhanced lifetime mortgage and how do they work? To answer this question, we must first explain how equity release works and take a crash course on lifetime mortgages. In this guide, you’ll learn the basics of equity release, the purpose of an enhanced lifetime mortgage and much more. 

What is equity release?

Equity release is an overarching term to describe two financial products that allow senior homeowners to borrow against their home equity. These two products are called a lifetime mortgage and home reversion plan, which we will explain in detail shortly. 

You must be at least 55 years old and have already paid off your residential mortgage to qualify for an equity release plan. Moreover, you must be borrowing against the equity in your main residence, as opposed to any rental property you may own. Sometimes a lender will only provide equity release if your property exceeds a minimum valuation – on top of passing property surveyor inspections. 

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How does equity release work?

Equity release is different from other loans that allow you to borrow against equity because they do not require any monthly repayments. The loan you receive is only repaid after you die or move into long-term care. 

At which point, the property that you released equity from must be sold and some or all of the sale proceeds used to repay the debt. Whether you use a lifetime mortgage or home reversion plan, the money you repay will be greater than the amount loaned to you initially. How much extra you pay back will be determined by the details of your equity release scheme, and possibly by the length of time since you took out the loan. 

A lifetime mortgage is the most common method of equity release. 

What is a lifetime mortgage and how does it work?

A lifetime mortgage is a type of loan that allows seniors to borrow against their home equity without having to make repayments. They repay the debt when they die or move into care by selling their home and using the sale money to repay what is owed. But how much will be owed?

The loan is charged with a fixed interest rate, and this interest doesn’t have to be repaid each month either. Consequently, the interest rolls up and causes the debt to grow bigger each month. 

For example, someone who uses a lifetime mortgage to borrow a tax-free lump sum of £65,000 on a fixed rate of 6.4% would owe close to £137,000 after 12 years of zero monthly repayments. 

Why do people use equity release plans?

Equity release is used by seniors to improve the quality of later life, often helping to fund their retirement. Many people will want a lump sum to help pay for everyday expenses and improve their quality of living, or the money could be used to pay for luxuries, such as holidays or home improvements. Those with poor health may use some of the lifetime mortgage loan to pay for private healthcare services, or services to help them manage their home.  

Some seniors give some or all of their lump-sum loan away to family members. One of the most common reasons for doing this is to help loved ones buy their own property, while they are still around to see the fruits of their home equity. 

What is an enhanced lifetime mortgage?

An enhanced lifetime mortgage is a variation of standard lifetime mortgages and is aimed at people with general health issues, medical conditions and possibly a terminal illness. 

Standard lifetime mortgages allow most homeowners to borrow up to 60% of their home equity in a best-case scenario. But an enhanced lifetime mortgage could allow the senior homeowner to borrow more than what they could get from a standard lifetime mortgage, and possibly more than 60% of their equity. 

If you are deemed to have poor health – and therefore a shorter life expectancy or require long-term residential care sooner – the lender will consider loaning you more money because they believe that the debt will need to be repaid quicker than if they are borrowing to someone with perfect health. 

You could borrow more if you have a serious illness like cancer, or even if you just have high blood pressure.

A homeowner may wish to borrow more with an enhanced lifetime mortgage to help fund private medical care and improve their quality of life, especially if they have been diagnosed with a terminal illness. 

Do I need a medical to apply for an enhanced lifetime mortgage?

Applying for enhanced lifetime mortgages does not require applicants to undergo a medical. The lender will ask the applicant to complete a health and lifestyle questionnaire as part of their application. They may also need to submit a doctor’s report to back up any claims they have made within the health and lifestyle questionnaire.  

Other than the health and lifestyle assessment, the process of applying for an enhanced lifetime mortgage is no different to applying for standard lifetime mortgages. 

What are the advantages of an enhanced lifetime mortgage?

The benefits of enhanced lifetime mortgages are:

  1. You can borrow a tax-free lump sum without needing to make repayments
  2. You only repay when you die or move into care
  3. You continue living at your home and are never forced out for other reasons
  4. The money can be spent on anything or given away (there could be inheritance tax implications!)
  5. You can borrow more than using standard enhanced lifetime mortgages

Which companies offer enhanced lifetime mortgages?

An enhanced lifetime mortgage can be found with an array of companies, some of which deal specifically with equity release products while others may also offer other financial products and insurance (e.g. Aviva). There are a handful of banks that offer different types of lifetime mortgages, but many UK banks stay away from equity release. 

You should only apply for a lifetime mortgage after receiving personalised advice from an independent professional. And you should only apply for a loan from a company that is legally operating in the UK, which means being authorised and regulated by the Financial Conduct Authority. 

What are the different types of lifetime mortgages?

There are other types of lifetime mortgages as well as an enhanced lifetime mortgage. Two of the most common types of other enhanced lifetime mortgages are:

  1. A drawdown lifetime mortgage – this is exactly the same as a standard lifetime mortgage but the money is paid out using a drawdown facility (regular payments) rather than as a lump sum payment. 
  2. A flexible lifetime mortgage – this is when the homeowner has the option to make repayments each month, often to pay back some or all of the interest applied. The benefit of doing this is that your debt will not be as big when it comes to repaying. This will mean not having to give up as much of your property’s sale proceeds – and it could mean more inheritance for your loved ones. 

Sometimes lenders will offer a combination of these types, such as a drawdown lifetime mortgage that allows interest repayments. 

The Equity Release Council

If you are considering an equity release plan, you should know about the Equity Release Council. This is a group that invites equity release lenders to become members and stick to the council’s rules and guidelines. These rules are set to give senior homeowners extra protection, guarantees and reassurances. 

For example, one of the most infamous rules of the group is the negative equity guarantee. The negative equity guarantee is a guarantee that the homeowner will never have to pay back any more money than what their home sells for when they move into care or after death. For example, if your total equity release debt is £210,000 when you move into care and needs to be repaid, but your home sells for £200,000, you will not need to pay the additional £10,000. 

It is in the interest of lenders to join the council because many homeowners will only consider lenders with membership because they know they have additional protection. 

What are the pitfalls of a lifetime mortgage?

Martin Lewis believes the biggest pitfall of any lifetime mortgage is borrowing more than you need and releasing too much equity from your home too early, giving the debt more time to grow significantly. It’s also important to get financial advice from an equity release expert

Another potential pitfall of equity release is not understanding the consequences of using these schemes. For example, increasing your wealth and keeping some of it in the bank could affect your eligibility to receive means-tested benefits. 

Can you pay back a lifetime mortgage?

You can pay some of your lifetime mortgage back each month with a flexible option, as explained earlier. And you can even pay off all of your lifetime mortgage early if you decide you don’t want to have the loan anymore. However, as these loans are supposed to last the remainder of your life, the early repayment charges can be exceptionally expensive. 

Some lenders offer lower early repayment fees that make getting out of the agreement easier. For example, at the time of writing both LV and More 2 Life both have 0% early repayment costs after 10 years of having a lifetime mortgage. 

What is enhanced equity release? (Quick recap!)

Enhanced equity release is a type of secured home equity loan exclusively available for senior homeowners over 55. Like a standard lifetime mortgage, the homeowner does not need to make any monthly repayments and only repays the loan after they die or move into care. The key difference is that an enhanced lifetime mortgage could allow people with poor health to borrow against more equity, which could be used for private healthcare. 

Uncover further details about lifetime mortgages with MoneyNerd!

If you want to know more about enhanced lifetime equity plans, home reversion or anything else to do with equity release, you’re already in the #1 place. Check out our other articles, lender reviews and discussion posts all about equity release at MoneyNerd. 

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