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Lifetime Mortgage

Lifetime Mortgages

What is a lifetime mortgage and how does it work? Homeowners in later life are often denied credit due to their age, but there is a way to borrow against the value of your home and not have to make any monthly repayments. It may sound too good to be true, but with a lifetime mortgage, it is possible. 

Learn everything you need to know about lifetime mortgages in this guide. We’ve covered it all in this easy-to-read guide, from how they work to how it may affect your tax position and eligibility for means-tested benefits.  

What is a lifetime mortgage?

A lifetime mortgage is a type of equity release loan available to senior homeowners over the age of 55. It is one of only two equity release loans available in the UK. It allows these senior homeowners to borrow against some of their home equity but not have to make monthly repayments. 

The loan has a fixed interest rate causing the total debt to grow continually until the debt has to be repaid. The only time the loan and the accumulated interest has to be paid back is when the last surviving homeowner moves into long-term residential care or when they die, in which the property must be sold from the estate. 

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How does a lifetime mortgage work? (Simple example)

It is easier to understand a lifetime mortgage with an example. Let’s imagine Phil is 63 years old and retired. Phil was told he cannot borrow any money using personal loans because of his age, but he can borrow against his home equity and not have to make monthly repayments with a lifetime mortgage. 

He releases £65,000 which is paid out to him as tax-free cash. This lump sum will be charged with a fixed interest rate of 6.4% that does not have to be paid either, but simply gets added to the total debt over time. 

After 12 years when Phil is 75, he passes away and the debt needs to be taken from the sale proceeds of his home. Any remaining money from the house sale will be split between beneficiaries or as stated in Phil’s will. 

Due to all of the interest being added over the 12 years, the total now owed is just short of £137,000. His property sells for £200,000, meaning the estate beneficiaries receive around £63,000 only and the rest is paid to the equity release provider. 

Who qualifies for a lifetime mortgage?

Lifetime mortgages require all homeowners to be at least 55 years old, and they may ask that all homeowners are below a certain age as well, typically 85 years old. 

They must be taking out the loan on their main residence which should have no outstanding debt or residential mortgage attached. If you do have a small loan secured by your property, most equity release lenders will make it a condition that this debt is paid off as soon as you receive the lump sum.

If you qualify to apply and do so, the lender will then come and assess your property using surveyors. They will work out the value of your home to determine how much you can borrow, and assess the property in detail, which could still lead to a credit refusal. 

What is a lifetime mortgage used for?

Because lifetime mortgages are only available to homeowners in later life, the lump sum loan is usually used to help fund retirement. This may include things like private healthcare, annual trips and holidays, home improvements that make elderly living easier or just general living expenses. 

Some seniors decide to release their equity and give the money to their children and help them with their own property purchases. But be aware that any financial gifts are still subject to inheritance tax if they are given within seven years of your death. 

How much can I borrow on a lifetime mortgage?

The amount you can borrow on a lifetime mortgage will be determined by your age, the value of your home and details about your home which are assessed by surveyors. Not to forget the individual lender and what they are preferred to offer.

In most cases, the most you can borrow with standard lifetime mortgages is capped at 60% of your home equity. So if you have a £200,000 home, the biggest loan you could get would be £120,000. 

If you have a reduced life expectancy due to a medical issue, there could be an opportunity to borrow against even more equity. This is possible through an enhanced lifetime mortgage, which will be explained later. 

What are the pros and cons of a lifetime mortgage?

There are pros and cons of an equity release lifetime mortgage just like any other loan. The benefits of using a lifetime mortgage are:

  1. It is a credit option in later life when options may be limited
  2. It provides a tax-free lump sum
  3. You do not make any monthly repayments
  4. You continue living at home and are not forced out
  5. Lifetime mortgages can be spent on anything you want

While the drawbacks of using lifetime mortgages are:

  1. The rolling interest rate causes the debt to grow significantly and will decrease the value of your estate passed on to loved ones
  2. You will have to sell the family home to repay the debt, and it won’t be passed on to family unless the lender accepts a cash payment, which may also not be beneficial
  3. Receiving a lump sum could cause problems when receiving means-tested benefits. You may lose entitlement to means-tested benefits completely. More on this later! 
  4. The early repayment charge on lifetime mortgages can be excessive. Sometimes the early repayment charge is wiped after ten years of having the loan. 
  5. You must receive advice and legal services to complete the application, which creates an additional cost. 

Are lifetime mortgages safe?

Lifetime mortgages are safe to use as long as you only borrow from an equity release provider that is operating legally in the UK. This means the lender should be authorised and regulated by the Financial Conduct Authority. On top of this, it can be highly beneficial to use a lender that is a member of the Equity Release Council.

What is the Equity Release Council?

The Equity Release Council is a group that has created a list of rules and guidelines that all of its members must follow. It is not compulsory for equity release providers to join the Equity Release Council, but doing so makes them more appealing because the aforementioned rules are created to benefit homeowners. 

These rules offer further protection and reassurances which you may not get if you use equity release providers that are not members of the Equity Release Council. One of the best examples is the negative equity guarantee. 

The negative equity guarantee is a guarantee that the homeowner will never have to pay a lifetime mortgage debt that exceeds the sale value of their property. 

For example, if their lifetime mortgage has been growing for 20 years and has become greater than their property value, only the sale proceeds can be collected and the rest of the debt cannot be chased by the lender. Moreover, the lender cannot get the estate beneficiaries to pay the remaining debt either. If you do not use a council member, you may not have a negative equity guarantee. 

Where can you get a lifetime mortgage?

Lifetime mortgages are widely available in the UK but are not as accessible as other loans from high-street banks. Many UK banks do not offer equity release loans, so you need to turn your attention to specific equity release lenders or companies that usually offer investment and insurance products. 

Some examples of companies that offer equity release are:

  1. Aviva
  2. LV
  3. One Family
  4. Pure Retirement
  5. Legal & General
  6. More 2 Life

Read about some of the best equity release deals now!

Are there any other types of lifetime mortgages?

The lifetime mortgage explained at the start of this guide is the standard type of lifetime mortgage. But there are some variations of these loans. Three common variations are:

  1. Drawdown lifetime mortgage

A drawdown lifetime mortgage works just like the standard loan, but it provides the homeowner with a drawdown facility to access their loan rather than giving them a lump sum. This means they can take parts of their loan in stages, and usually only pay interest on the amount they have actually taken, which could save money on interest. 

  1. Voluntary repayment lifetime mortgage

A voluntary repayment lifetime mortgage – also known as a flexible lifetime mortgage – allows the homeowner to make voluntary repayments on the interest each month. This can be all of the interest or a percentage of it. The reason you might decide to do this is to stop the debt from escalating into a much greater debt, and thus ensure your loved ones receive more money from your estate once you pass away. 

  1. Enhanced lifetime mortgage

ALT TEXT: mortgages lifetime enhanced

We referred to an enhanced lifetime mortgage earlier in this guide. It is the same as a standard lifetime mortgage secured against your home, but it is aimed at people with poor health and terminal illnesses. 

If your life expectancy is reduced or the time expected before requiring residential care is short, the lender will offer to lend you more of your equity than a standard lifetime mortgage offers. This could be used to pay for private healthcare to improve the quality of later life. 

As part of the application, the homeowner must complete a health and lifestyle questionnaire and possibly supply the lender with a doctor’s report. They will not be asked to complete a medical. 

Can you pay back a lifetime mortgage?

As lifetime mortgages are designed to last the rest of your life, lenders usually apply high early repayment charges. This typically makes them unaffordable to get out of. However, some lenders allow you to exit the agreement at a much smaller cost or even at no additional cost (on top of repaying the loan with a lump sum) after so many years. 

There are a handful of lenders that charge 0% early repayment fees after ten years. By this time the debt may have already grown significantly and be expensive to get out of. 

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

A lifetime mortgage and equity release are kind of the same thing – but not exactly. A lifetime mortgage is one of two methods of equity release for homeowners aged 55 and above. The other equity release method is called a home reversion plan.

What is a home reversion plan?

A home reversion plan works in a similar way to a lifetime mortgage. It provides a lump sum or drawdown loan secured against your home and requires no monthly repayments. The loan only has to be repaid through the sale of your property after death or after moving into long-term care. 

The key difference between a lifetime mortgage and a home reversion scheme is that the latter does not apply any interest to the loan. Releasing equity is done with the condition that the homeowner must give the lender a fixed percentage of the future property sale. For example, you may release 30% of your equity today and have to give the lender 70% of the future property sale, regardless of if it increases or decreases in value.

What is the best type of equity release? (lifetime mortgage vs home reversion)

The only way to know for certain whether to use a lifetime mortgage or home reversion plan is to receive personalised financial advice. The overall cost of both loans can be similar after a decade or more depending on interest rates applied to the lifetime mortgage. Lifetime mortgages do tend to be the more popular choice. 

Is equity release tax-free cash?

The money you receive when you take out a lifetime mortgage is 100% tax-free. But there may be inheritance tax implications – good and bad – if you take out a lifetime mortgage and gift the money to others. 

Does equity release affect your state pension payments?

Taking out a lifetime mortgage will not affect your rights to receive a basic state pension. But it can affect your eligibility to receive means-tested state benefits, which would include Pension Credits, Universal Credit and a Council Tax Reduction. You should discuss all of this with your adviser before releasing equity. 

How much does it cost to arrange a lifetime mortgage?

The financial services required to set up and arrange a lifetime mortgage can equate to thousands of pounds. You should expect to pay around £1,000 for the services of an equity release adviser and an equity release solicitor, each. The overall costs could be higher. 

Alternatives to equity release

All alternatives to equity release should be explored by your equity release adviser. One of the most common alternatives used is to sell your home and downsize to a less-valuable home. 

This will create some money that could be used to fund retirement. But this may be a tough decision as well because you may have sentimental ties to your family home, along with the stresses that come with moving in later life. 

What is a lifetime mortgage? (Quick recap)

A lifetime mortgage is one of two equity release loans used by homeowners aged 55 and above. It allows them to release up to 60% of their home equity and not have to make any monthly payments on the debt. 

The debt will have significantly increased due to the accumulated interest. The total owed is only repaid after death or moving into long-term care. Their property will be sold to raise cash to clear the debt at this point. 

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