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Lifetime Fixed Mortgage – What Is It and How Can It Help You?

lifetime fixed mortgage

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

A lifetime fixed mortgage could be an optimum method of funding your retirement. This equity release plan – not to be confused with fixed-rate residential mortgages – will provide you with a tax-free lump sum and no monthly repayments to make. Learn more about lifetime fixed mortgages and how they could help you in later life, right here! 

What is equity release and who is eligible?

Equity release is a method of borrowing exclusively available to people who own their own home and are over the age of 55. The loan is not repaid each month and is often used as a way to fund retirement or improve life as you get older. To be eligible for an equity release loan you usually need to own a property with no debts secured against it, and that includes a mortgage.

The loan can be provided to you as a lump sum or drawdown facility. There are no monthly repayments to make on the debt because it is only repaid in full when you die or move into long-term care. When either of these events happen, the debt is repaid by selling the homeowner’s property and giving some or all of the sale proceeds to the equity release provider.  

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How many methods of equity release are possible?

There are two types of equity release in the UK for people in later life. These are called lifetime mortgages, also known as a lifetime fixed mortgage, and home reversion plans. The former is more popular and widely advertised than the latter. Either should only be considered from legal companies that are authorised and regulated by the Financial Conduct Authority. 

What is a home reversion plan?

A home reversion plan provides the homeowner with a lump sum or drawdown loan but does not charge any interest on the loan. The home reversion plan provider will instead ask the homeowner to agree that they can have a fixed percentage of their home’s future sale value. 

For example, let’s imagine you own a property in London. The value of your home is £300,000 and you decide to release 30% of your equity, equating to a £90,000 lump sum. In return, the home reversion provider will request that they receive 75% of your property value when the home is sold. 

So you may end up paying £225,000 for your £90,000 loan. If the repayment isn’t due for a decade or more, the property could be worth a lot more and you pay back even more!

What is a lifetime mortgage?

A lifetime mortgage is the other method of equity release in the UK and the far more popular option. They do not work in the same way as home reversion plans because they charge interest to determine how much needs to be repaid when you die or move into care. 

How do lifetime mortgages work?

Lifetime mortgages work by charging interest on the loan you take out. This interest – just like the principal loan – does not need to be paid back to the lifetime mortgage provider each month. When it does come time to repay the loan, the principal amount plus the interest is the amount recovered from the property sale money by the lender. The overall cost of the loan can be expensive if the lifetime mortgage has been incurring interest for a long time. 

Can I get an example of a lifetime mortgage?

To understand how a lifetime mortgage works, it is best to read a simplified example

Let’s imagine you are 60 years old and you and your spouse – also 60 – own a home worth £195,000. You want to release £65,000 equity to pay for a new bathroom with adaptions for elderly living, and you want to use the rest of the money to contribute to your retirement.

You receive a tax-free £65,000 lump sum and agree to an interest rate of 6.4%. After seven years, your partner sadly passes away. At this point, the lifetime mortgage does not need to be repaid because it only gets repaid when the last surviving partner (named on the equity release plan!) dies or moves into long-term care. 

Five years later, you pass away meaning you have held the lifetime mortgage with interest building up for 12 years in total. By this time, your initial £65,000 debt will have more than doubled to approximately £137,000. Over the same period, your property value has increased by 10% making it now worth almost £215,000. 

If the property sells for its market value, the lender will be entitled to recover £137,000 from the £215,000 sale money, leaving £78,000 for your estate and its beneficiaries. As the example shows, the overall cost to repay lifetime mortgages can be high. 

How much can you borrow with a lifetime mortgage?

lifetime mortgage work

A lifetime mortgage will allow homeowners to borrow up to 60% of the value of their property in a best-case scenario, so most people should expect to be able to borrow less than this figure. The amount you are allowed to borrow depends on the lender used, your age and other factors. 

Are lifetime mortgages fixed rate?

Most lifetime mortgage providers offer a fixed interest rate for the entirety of the loan period. However, if you use a drawdown lifetime mortgage where you access an initial lump sum and then access more money from the cash reserve, any subsequent drawdown after the initial lump sum may be charged a different fixed interest rate. 

Is that why they are also called a lifetime fixed mortgage?

Lifetime mortgages may also be known as lifetime fixed mortgages because the interest rate is usually set at a fixed rate. 

However, this can cause some confusion because some people believe they refer to residential mortgages with a fixed rate for life. These do not exist as even fixed-rate residential mortgage deals revert to a standard variable rate (SVR) mortgage after an initial fixed-rate period. 

What is the standard interest rate on lifetime mortgages?

The standard interest rate on lifetime mortgages ranges from 2% to 8% depending on your age, the value of your property, other details about your home, and of course, the lender. 

Securing the lowest rate possible is important to prevent the debt from growing exponentially and making the overall cost of repaying the lifetime mortgage loan overly expensive. 

What are the benefits of a lifetime mortgage?

Senior homeowners choose to use a lifetime mortgage for many reasons, including but not limited to:

  1. It may be the only method of releasing equity available to them
  2. Access a large loan amount
  3. The loan can be provided as a lump sum or drawdown
  4. The loan is tax-free and can be spent as desired without restriction 
  5. You do not have to make monthly payments
  6. You continue living at your family home without paying rent

What are the pitfalls of a lifetime mortgage?

later life mortgage

The pitfalls of using a lifetime mortgage are:

  1. Not fully understanding what you are agreeing to over the long term
  2. Not fully understanding how a compounding interest rate works
  3. Not accessing reputable equity release financial advice (see 1 and 2 above)
  4. Not getting the right plan for your needs, including longer-term plans like downsizing
  5. Not understanding how lifetime mortgages can affect entitlement to receive means-tested benefits. 
  6. Exiting the agreement can be impossible when there are high early repayment charges 

Do banks do a lifetime mortgage?

Most banks do not offer lifetime mortgages. Some banks will advertise a lifetime mortgage but they pass you on to a dedicated lifetime mortgage lender working on their behalf, such as Lloyds Bank. There may be some exceptions to this, including Nationwide which do offer lifetime mortgages to people between the ages of 55 and 84. 

Where else can I get a fixed rate only lifetime mortgage?

You can get a fixed-rate lifetime mortgage from specialist equity release companies. These are businesses that only deal with the two types of equity release and nothing else – or even just lifetime mortgages. 

A number of other companies will offer equity release alongside loans, investments and insurance products. A prime example of this is Aviva, a recognisable brand that offers many financial products and services. 

What are the different types of a lifetime mortgage?

The above explains the standard lifetime mortgage and a slight variation of a drawdown lifetime mortgage, but there are further types of lifetime mortgages in the UK. Two of the most popular are:

  1. Enhanced lifetime mortgages – a variation for people with poor health or shorter life expectancy. It can help these people access more of their home equity than using a standard equity release loan. 
  2. Flexible lifetime mortgages – a variation that permits homeowners to make voluntary interest repayments of their choosing, so they can mitigate the overall cost of the debt and safeguard some of their wealth for estate beneficiaries in the future. 

What is the Equity Release Council?

Some lenders will join a group called the Equity Release Council to try and improve the equity release industry’s reputation and to simultaneously make their lifetime mortgage products more appealing to seniors. 

The council creates a list of rules and guidelines that all members must agree to follow, and these can provide significant benefits and guarantees to the senior homeowners. One of the most beneficial is the negative equity guarantee, an assurance that a lender will never chase a debt that cannot be completely repaid by the sale of the property.

For example, if your lifetime mortgage debt has grown to £120,000 but your property only sells for £100,000 then the £20,000 shortfall will not be chased by the lender. 

You can be sure that all members are legal equity release providers because they must be authorised and regulated by the Financial Conduct Authority to join. 

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

Equity release and lifetime mortgages are two terms often used interchangeably due to home reversion plans – the other method of equity release – being much less common. However, equity release still means both types of loans and a lifetime mortgage is therefore just one of two options. 

You could say that all lifetime mortgages are an equity release loan, but not all equity release loans are lifetime mortgages. 

What are the alternatives to a lifetime mortgage?

If you need a way to fund your retirement but don’t want to take out a lifetime mortgage, you could consider a number of options best discussed with a financial adviser. One of the popular alternatives is to downsize and use some of the money raised to improve the quality of later life. 

What is a lifetime fixed mortgage? (Quick summary!)

A lifetime fixed mortgage is a type of equity release loan only available to senior homeowners over 55. These loans only have to be repaid when the last surviving homeowner – who is also named on the plan – dies or moves into care. The loan is repaid in full by using the debtor’s home. It will be sold and some or all of the sale money is used to clear the debt.

Lifetime fixed mortgages can get expensive over time and eat into the value of your estate. 

Keep learning about lifetime mortgages for free!

Don’t look further than MoneyNerd for more information on how to release equity in England and Wales using an equity release plan or lifetime mortgage. All our friendly and easy-to-read guides will remain completely free! 

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