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Equity Release Lifetime Mortgages – All You Need To Know

Equity Release Lifetime Mortgage

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

What is an equity release lifetime mortgage and how do they work? We explain everything you need to know about lifetime mortgages in the UK here. Use this guide as your ideal crash course before exploring this method of borrowing for seniors in further detail. 

What is equity release and who qualifies?

Equity release is a method of borrowing secured against your home. There are two types of loans that qualify as equity release. These are called lifetime mortgages and home reversion plans, although the former is significantly more popular and available than the latter. 

Both types of loans allow the homeowner to access some of their equity as a tax-free lump sum. The key difference between equity release and other loans is that equity release demands no monthly repayments

Instead, the debt is repaid as a single payment after you die or move into care. This is achieved through a forced sale of your property and using the money raised to pay off the debt. 

Equity release is exclusively available to senior homeowners over the age of 55 – and sometimes below the age of 85. The homeowner must have no outstanding debts attached to their property, including a residential mortgage. Some lenders may allow you to apply with a small mortgage as long as you agree to pay it off when you receive your lump-sum loan. 

The property that you take out a lifetime mortgage or home reversion plan on must be your main residence, and it may need to meet a minimum valuation of around £80,000. 

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Why do people use equity release?

Older people can use equity release to make their retirement or later life more comfortable. The money could be used for a wide variety of things, including general living expenses, holidays and staycations, private medical services, home improvements and much more. 

You may even decide to use equity release and give your lump-sum loan away to family members. This is usually done to help them buy their own home or to start a business. Doing so will not affect your tax position but the money given away may still be subject to inheritance tax if you die within seven years of gifting the money. 

Why is equity release a bad idea?

Historically, equity release had a bad reputation and was always considered a bad idea. But this is not always the case and many seniors can improve their quality of later life by using one of these loans. 

One reason why people think that equity release is always a bad idea is that these loans can be expensive. You can end up paying back double or more your initial loan amount. This is not a major concern for most people who do not have children to inherit their estate, but if you do, it makes the decision much more difficult. 

By having to pay out a much larger percentage of the value of your home when it is sold, your estate beneficiaries are significantly losing out. 

What is the difference between equity release and a lifetime mortgage?

A lifetime mortgage and equity release are not the same thing. A lifetime mortgage is one of two loans that fall within the equity release sector. Thus, all lifetime mortgages are one form of equity release, but not all equity release is done with a lifetime mortgage. 

It’s simultaneously important to realise the difference between equity release and releasing equity. The former is a way for people in later life to borrow against their equity while releasing equity could refer to equity release, remortgaging to release equity, home equity loans etc. Therefore equity release is just one method of releasing equity.

How does an equity release lifetime mortgage work?

A lifetime mortgage – also known as an equity release lifetime mortgage – provides up to 60% of home equity as a loan and charges the loan with rolling interest. What this means is that the interest doesn’t need to be repaid either. It rolls up and gets added to the total owed each month, causing the debt to keep growing. 

It is often possible to make voluntary repayments on the interest to keep the total debt lower.

How do I repay a lifetime mortgage?

A lifetime mortgage is repaid when you die or move into long-term care. When either of these things happens, the homeowner’s property must be sold to raise money. Some or all of this money is first used to clear the debt owed to the equity release lifetime mortgage provider. Any remaining money is given back to the homeowner or added to their estate for beneficiaries, in the event of moving into care or death, respectively. 

It may be possible for the estate beneficiaries to pay off the debt using cash from the estate and keep the property. There are benefits and drawbacks of doing so, which are best discussed with a financial adviser. 

A simplified equity release lifetime mortgage example

Understanding how an equity release lifetime mortgage works is best accomplished with a simplified example:

Let’s imagine Harry is 60 and has a property he lives at in Norwich that is currently worth £210,000. He has no debts attached to his home, meaning he owns it completely outright. He decides to take out £65,000 in equity to improve the quality of later life and agrees to a fixed interest rate of 6.4%. After 12 years of having his lifetime mortgage, Harry sadly passes away. 

At this point, his debt will have grown to approximately £137,000. Over time, his property has also increased in value by 10%, meaning it is now worth £231,000. The property sells for this price as part of the process to repay the debt. 

£137,000 is paid back to the lifetime mortgage lender, and the remaining money £94,000 (minus fees etc.) is paid back to the estate and split between beneficiaries as directed in Harry’s will. 

How much can you get on a lifetime mortgage?

Most equity release lifetime mortgage providers will allow homeowners to access a loan worth up to 60% of their home equity at most. The exact amount you will be offered is typically dependent on your property and age. 

You can work out your home equity as the value of your home minus debts attached to the property. But considering you’ll likely need to have no debts attached to your home to apply, this will just be 60% of your current property value. 

How much this initial loan amount will grow can be calculated with the help of an equity release calculator. 

The different types of equity release lifetime mortgage

Above we have discussed a standard equity release lifetime mortgage but there are some alternatives:

  1. Enhanced lifetime mortgage

Enhanced lifetime mortgages are aimed at people with poor health and a shorter life expectancy. They allow these people to access more equity than normal because the lender believes they will be repaid the debt quicker than standard due to their health conditions. The money received is usually used for private healthcare treatments and to improve the quality of life in retirement. 

  1. Drawdown lifetime mortgage

A drawdown lifetime mortgage works exactly the same but provides the loan as a drawdown facility where the homeowners can access their money as regular payments. There are some benefits of choosing this method, such as keeping your eligibility to receive means-tested benefits from the government. This option is best discussed in detail with a financial adviser. 

Who offers a lifetime mortgage?

Equity release lifetime mortgages are typically available through companies that also offer insurance and investment products. Very few high-street banks offer them, but one that does is Nationwide Bank. 

What are the equity release lifetime mortgage interest rates?

Lifetime mortgage interest rates range from as low as 2% to as much as 8% or more. The rate offered to you will depend on your age and details about your home, assessed by surveyors. 

Can you pay off a lifetime mortgage?

You can pay off a lifetime mortgage early but this will usually incur an early repayment charge. These charges can be especially expensive and make exiting any lifetime mortgage almost impossible. However, there are some lenders – such as LV – that offer 0% early repayment costs after 10 years. 

The pros of lifetime mortgages

The benefits of taking out equity release products are:

  1. The money you receive is tax-free
  2. It can be spent on anything you want
  3. It can be taken as a lump sum or drawdown
  4. You make zero monthly payments
  5. You continue living in your home
  6. You can reduce the overall cost of a lifetime mortgage by making interest payments

What are the pitfalls of equity release?

The main pitfall of equity release is not completely understanding what you are agreeing to and not exploring alternative ways to fund your retirement. This can only be done with exceptional financial advice from an equity release expert. 

When you do have a consultation, make sure you tell them everything. Even small details like future plans to downsize are important to reveal as some plans allow this without charging additional fees, and others do not. 

Are lifetime mortgages safe?

Lifetime mortgages are safe to use as long as you get advice first and only use a lender that is authorised and regulated by the Financial Conduct Authority. It’s highly recommended to only use a lender that is a member of the Equity Release Council as well. 

What is the Equity Release Council?

The Equity Release Council is a group that invites lenders and any financial adviser working in the equity release industry to join. They are not obliged to do so. 

By joining they must agree to the council’s rules and guidelines, many of which have been made in the interest of homeowners and offer additional protection. One of those rules, namely the negative equity guarantee, can save homeowners who have a lifetime mortgage for a long time thousands of pounds. 

The negative equity guarantee states that a lifetime mortgage lender cannot chase a debt that goes unpaid because the property sale money does not cover all of the money owed. This may be the case if you have a higher interest rate, you have a lifetime mortgage for decades, your property decreases in value – or a combination of these reasons. 

What is a home reversion plan?

As mentioned at the start of this post, an equity release lifetime mortgage is just one of two methods of equity release. The other is a home reversion plan. 

A home reversion plan provides a loan and gets repaid in the same way, but it does not charge interest. The homeowner must agree to give the lender a much larger percentage of their property’s future sale money in comparison to the amount of equity released.

For example, releasing 20% of your equity today could mean giving up 65% of the sale money in the future. So if you took £20,000 out of a £100,000 property, you may need to pay back more than x3 this amount in the future. And if your property increases in value, you’ll pay back even more! 

Learn even more with MoneyNerd!

If you want to release equity in the UK but need more information before making an application, MoneyNerd can help. We’ve answered the most asked questions on these topics already. Read our latest equity guides for free on our site now!