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Lifetime Mortgage Rates – All You Need to Know

lifetime mortgage rates

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

What are the best lifetime mortgage rates? This is one of the main questions we will be taking a look at here. If you are considering a lifetime mortgage to fund your retirement, make sure you get equity release advice first and consider alternative options as well. Read on to uncover the details on lifetime mortgage interest rates. 

What is equity release?

Equity release is a way for senior homeowners to access a tax-free lump sum of cash without having to make repayments until after they die or move into long-term care. It is most often used as a way to help fund (an early) retirement or just to improve later life. But it can be used for anything the homeowner wishes. 

The equity release plan provides credit with no monthly repayments but it must be repaid eventually in one single payment. This happens by selling the homeowner’s property and using some or all of the sale proceeds to repay the lender. But as mentioned, this can only happen after the debtor has died or moved into care. 

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

There are two methods of equity release and a lifetime mortgage is the most common. This is why equity release and lifetime mortgages are usually thought of as the same thing, but because there is another equity release scheme that works slightly different – namely a home reversion plan – then the terms shouldn’t really be used to refer to the same thing. 

You might want to think of it like this; all lifetime mortgages are a type of equity release, but not all equity release plans are lifetime mortgages. 

How does a lifetime mortgage work?

A lifetime mortgage works by charging the loan with interest and making the debt grow bigger and bigger over time so when it does come time to repay, the lender receives much more than the initial loan amount. 

The interest that accumulates on the loan is not repaid each month either, but simply “rolls up” to make the debt grow. As is the case with all equity release products, the total amount owed is not repaid until after the last surviving homeowner (who is also listed on the equity release plan) passes away or moves into care. 

It is easier to understand lifetime mortgages with a simplified example of how they work… 

Lifetime mortgage example (simple!)

Arnold and Ruth are both in their late 50s and after receiving equity release advice, decide to take out a lifetime mortgage to help them retire a few years earlier and spend some of the time travelling to countries they always wanted to visit. 

They calculate that to retire early and do the things they want they will need a total of £65,000. They release this amount from their £200,000 home and agree to a compounding interest rate of 6.4%. 

11 years after taking out the lifetime mortgage, Arnold passes away. The debt does not need to be repaid yet because Ruth is still alive, named on the equity release plan and living at the property. But 12 months later, Ruth also passes away. At this stage, 12 years after taking out the loan, it needs to be repaid. 

Due to the rolling interest over 12 years, the total amount owed now stands at more than £135,000. Their property value increased by £25,000 during the 12 years and it is sold on market value (£225,000) to repay the debt. The amount owed to the lender is handed over and the remaining money goes into Ruth’s estate to be shared by her beneficiaries or how otherwise directed by Ruth’s last will and testament. 

What is the negative equity guarantee on a lifetime mortgage?

The negative equity guarantee is an assurance from the lender that they will not chase you for any outstanding debts that are not able to be repaid from the property sale. This might occur because:

  1. The lifetime mortgage was held for decades and the debt grew enormously
  2. The property declined in value and sold for less than expected
  3. A little from column A and column B

This guarantee is only followed by members of the Equity Release Council, a voluntary group that lenders are not forced to join. Using lenders with membership can afford more assurances, and you are guaranteed that they are authorised and regulated by the Financial Conduct Authority. 

What is the criteria for a lifetime mortgage?

Not everybody can get a lifetime mortgage. All applicants will need to be over 55 years old and in some cases, they will need to be younger than 85. Lifetime mortgages can only be used to release equity from the applicant’s main residence, considering the debt has to be repaid when they no longer live there permanently. 

This main residence should have no outstanding debt attached, including a mortgage. You may be able to apply with a small mortgage providing you clear the mortgage as part of the loan.

Why do people take out a lifetime mortgage?

The most common reason for taking out a lifetime mortgage is to help pay for retirement or expenses in later life, including medical bills. However, there are no restrictions on what you spend the money on. 

You can spend it on anything you like such as holidays, home improvements, vehicles and even give the money away. Many people do the latter when trying to help children get on the property ladder or start a business. There could be inheritance tax implications when you gift money to other people, whether the money comes from equity release or not. 

Are lifetime mortgages fixed rate?

Most lifetime mortgages are charged with a fixed rate for the entirety of the loan, however, some lenders may only apply an initial fixed-rate and then charge a variable rate which is influenced by the economy and the Bank of England base rate. 

Lifetime mortgage interest rates explained

Lifetime mortgage interest rates are typically compounding rates. What this means is the interest rate is applied to the initial loan amount plus the amount of interest accumulated so far. So the amount of interest charged on the second month will be more than the first month – and so on. This is what makes the overall cost of repaying lifetime mortgages so expensive over time. Compounding interest rates are found on other types of loans as well. 

What are the standard lifetime mortgage interest rates?

Standard lifetime mortgage interest rates at the time of writing are around 3-7%. However, this is subject to change and you should always research and compare lifetime mortgage rates when you are ready to apply. 

The rate you are offered can be determined by a number of factors, including:

  1. The lender and its loan to value (LTV) ratio
  2. Your lump sum loan amount
  3. Your age and even your health
  4. The value of your home
  5. Other details about your home, which may be uncovered by surveyors used by the lender

What is the lowest lifetime mortgage interest rate?

The lowest lifetime mortgage rates on the market at the time of publications are around 2%. It can be difficult to find the interest rates on these types of unique loans because they are not as often publicly advertised. 

Can you pay the interest off on a lifetime mortgage?

Some lenders will allow the homeowner(s) to pay off some or all of the interest each month. The homeowner will be able to decide how much interest they wish to repay, and because it is not compulsory, they will be able to change how much they pay or stop repayments altogether if they become unaffordable. 

Your standard lifetime mortgage may allow these interest repayments, or you may need a type of lifetime mortgage called a flexible lifetime mortgage or interest-only lifetime mortgage. Either way, this can be a useful arrangement if you want to prevent the debt from growing exponentially and to ensure more of your wealth goes to your family and loved ones in the future. 

Repaying all of the interest continually may even make it possible for estate beneficiaries to use any cash from your estate to clear the debt and keep the family home – if preferred. 

What are the advantages of using a lifetime mortgage?

The advantages of using a lifetime mortgage are:

  1. You can fund later life with no monthly payments
  2. You receive tax-free cash
  3. Continue living at your home
  4. Spend the money on anything

Can I pay off a lifetime mortgage?

It is possible to pay off your lifetime mortgage but expect to pay a hefty early repayment charge in the process. Because these loans are designed to last for life, the early repayment fees can be even more expensive than normal. However, some lenders reduce these fees as time passes and some reduce them all the way to 0% after 10 years. 

You might need to pay off a percentage of the loan if you are downsizing to a less-valuable property but taking the loan with you. If your credit agreement doesn’t include downsizing protection or a “downsizing clause” then an early repayment fee might be owed. 

What are the other costs of a lifetime mortgage?

Other than the cost to pay back the loan, there are a number of other fees to consider as part of the process. You may have to pay for the services of a financial adviser and an equity release solicitor, as well as admin fees, application fees and valuation fees to accurately determine the value of your home. 

You should expect to pay at least £2,000 including VAT for the services to set up your loan. However, the actual fees some people end up paying can be double this figure. 

Does a lifetime mortgage stop pension payments?

If you receive a lump sum and do not spend the money, your new wealth could mean that you do not qualify to receive means-tested benefits. However, the basic state pension is not means-tested and will not be affected by lifetime mortgages. You might lose access to Universal Credit, Council Tax Reductions and Pension Credits by releasing equity in this way. 

If you are worried about eligibility to receive some benefits after using equity release, you may want to consider a drawdown lifetime mortgage instead. This is when you receive your loan in stages so your wealth does not increase as significantly at once. It can also be used to reduce the interest you pay.