A lifetime mortgage is a loan secured against the value of your home and they are ideal for those entering their retirement. This type of mortgage enables you to release equity from your home, allowing you to spend it as you wish.
At Barlow Irvin, we have years of experience helping those entering their retirement years to secure a lifetime mortgage.
Key Points:
- Lifetime mortgages are suitable for those aged 55 and above
- They are a type of equity release mortgage
- You will always own your home with a lifetime mortgage
What is a lifetime mortgage?
A lifetime mortgage is a long-term loan that is secured against your home, allowing you to access some of the money tied up in your property. You still have ownership of your home, you can still live there and it doesn’t need to be repaid in full until you die or move into long-term care.
This type of mortgage is ideal for those planning for retirement as it enables you to release equity from your home.
How do lifetime mortgages work?
Unlike a standard residential mortgage, with a lifetime mortgage you don’t need to make monthly repayments. Instead, interest builds up on your loan each year. The interest is charged on the total borrowing amount and any interest previously added, which can quickly increase the amount you owe. The loan plus interest is repaid through the sale of your property once you have passed away or entered long term care.
When you take out a lifetime mortgage, you can either borrow:
- A lump sum
- An initial lower amount and several smaller amounts over time (drawdown)
What are the different types of lifetime mortgage?
As mentioned above, there are two main types of borrowing for a lifetime mortgage and these are typically what you will have to choose between when you apply.
- Lump sum lifetime mortgage – With this type of mortgage, the loan is secured against your house. You will receive a one time, tax free cash payment. This is a good option for those looking to help family on the property ladder, pay off debts or make home improvements.
Compound interest will be added to the mortgage until the plan comes to an end, you pass away or move into long-term care. - Drawdown lifetime mortgage – With this type of mortgage, you release equity in your home the same way, but it is paid in stages of your choosing. Your lender will usually agree on an amount you are able to release from your home. After an initial cash payment, the rest of your money is added to a reserve, ready for you to ‘drawdown’ as and when you need it.
Drawdown mortgages are ideal for those who think they may need access to additional funds in the future.
What is the difference between equity release and a lifetime mortgage?
The difference between equity release and a lifetime mortgage is that equity release is the financial arrangement that lets you unlock some of the funds tied up in your home; a lifetime mortgage is a type of equity release itself.
Lifetime mortgages are the most popular type of equity release plan open to homeowners aged 55 and over.
What are the lending criteria for a lifetime mortgage?
To be considered for a lifetime mortgage, applicants must:
- Be aged 55 or above
- Own a property valued at £75,000 or more
- Wish to be able to borrow at least £15,000
- Live in England, Scotland, Wales or Northern Ireland
It’s worth keeping in mind that different lenders will have their own criteria and so it is a good idea to shop around to find a lender who best aligns with your goals.
Costs associated with a lifetime mortgage
The cost of borrowing through a lifetime mortgage can be very high because of the way interest compounds over time. Unlike standard mortgages, you don’t have to make monthly repayments, but this can make them expensive as the interest rate arrives.
For example, if you took out a lifetime mortgage of £100,000 at a rate of 4.5%, you’d still owe £196,156 after 15 years. This is nearly double the amount of what you originally borrowed. This can be mitigated by making voluntary partial repayments each year, helping to reduce borrowing costs.
If the growth of house prices is strong enough throughout the period of your lifetime mortgage, you could still end up with a substantial amount of equity in your home even after your outstanding debt is settled.
Can you pay off a lifetime mortgage in advance?
Yes, if you take out a lifetime mortgage you can pay back some or all of it early. However, since lifetime mortgages are long-term products, paying it off early isn’t usually the best option.
Some lenders may require you to pay an early repayment fee, which can be very high.
What if you owe more than the value of your home?
If there is not enough money left from the sale of your home to repay the mortgage, your beneficiaries might have to repay any extra above the value of your home from your estate.
To protect yourself and your beneficiaries from this, most lenders offer a no-negative-equity guarantee.
Pros and cons of lifetime mortgages
Before you apply for a lifetime mortgage, you should consider the pros and cons of them.
Pros of a lifetime mortgage
- You’ll have tax free cash – Lifetime mortgages allow you to release equity from your home in the form of a cash lump sum. You can use the money to pay off debts, help family get on the property ladder and even make home improvements.
- You can stay in your home – There’s no need to move home with this type of equity release, meaning you still get to retire in the house you love and can focus on making improvements on it.
- You don’t have to make any monthly repayments – You don’t need to make any repayments until you die or enter long term care.
- You can avoid paying inheritance tax – Lifetime mortgages can reduce the value of your estate, which in turn can reduce your Inheritance Tax.
Cons of a lifetime mortgage
- Your debt will increase due to interest – The interest rate on a lifetime mortgage can “roll up” due to compound interest.
- You might have to pay an early exit fee – If you choose to repay all the loan early, there may be an early repayment fee.
- You can’t take another loan out against your home – No other loans can be taken out against your home once you’ve taken out a lifetime mortgage. Some providers may allow you to take out more equity later if there is remaining equity in your property.
There are fees to pay – Lifetime mortgages typically come with fees from lenders, advisors and solicitors with charges ranging between £1,500 and £3,000.
Do you still own your home if you take out a lifetime mortgage?
Yes, when you take out a lifetime mortgage you will still own your home. The loan is paid off with the proceeds from the sale of the house after the last named borrower on the mortgage dies or goes into long term care.
If you choose to move home before the loan is paid off, your lifetime mortgage can be transferred to your new home. However, some lenders will have their own restrictions to do with this.
FAQs about Lifetime Mortgages
Can you rent out your house when you have a lifetime mortgage?
Renting out your home when you have a lifetime mortgage may be possible, but you should establish the terms of your agreement first in order to avoid any violations.
As long as the home remains as your main place of residence, then renting out your house may be permissible.
Can you move home with a lifetime mortgage?
Yes, you can move house if you have a lifetime mortgage. In most cases, you should be able to transfer your equity release debt to your new home as long as your lender is satisfied the property you’re moving to offers enough security for the money you have borrowed.
What happens if you die with a lifetime mortgage?
Following the death of the last borrower, the loan on a lifetime mortgage will need to be paid. The settlement figure is made up of the fund initially borrowed and the interest acquired during the life of the mortgage.
The amount owed back to the lender is usually paid back from the sale proceeds of the property.
Can you still claim benefits with a lifetime mortgage?
If your benefits are based on your savings and income, these could be affected by your lifetime mortgage as the money you unlock from your home may increase the amount you have in the bank.
The main type of benefits you will need to consider include:
- Council Tax reduction
- Universal Credit
- Energy grants