This content was reviewed and approved by Amy Fletcher.
Many homeowners look for ways to access money tied up in their property later in life without needing to move. There are several financial products designed to help people do this, each with different features, eligibility requirements, and long-term considerations.
Before taking out any later-life borrowing secured against your home, you’ll most likely start by speaking to a financial adviser or retirement advice specialist. They’ll look at your existing financial circumstances as well as understand what your plans and needs are for retirement. Following this, you’ll know what the best options are to fund your retirement, which could be a lifetime mortgage.
In this guide, we’ll explain how lifetime mortgages work, who they’re designed for, and what you may want to consider before taking one out.
The information on this page should not be considered as financial advice. If you are unsure what’s right for you, please make sure you speak to a financial adviser.
What is a lifetime mortgage?
A lifetime mortgage is a loan secured against your home that allows you to access some of the value you’ve built up in your property over time.
Unlike a standard mortgage, a lifetime mortgage usually does not need to be repaid until the last borrower either passes away or moves into long-term care. At that point, the property is typically sold and the loan - along with any interest that has built up - is repaid.
If you decide to explore this type of borrowing, you will normally begin by speaking with a financial adviser. They will assess your financial situation, explain how the product works, and help determine whether it is appropriate for your needs.
Who is eligible for lifetime mortgages?
To get a lifetime mortgage you must be a minimum of 55 years old, although individual providers may vary. If you are applying as a couple, then the youngest person in the couple must be over 55 years old.
As well as this, you also have to own a certain type of property. Some properties like houseboats, listed properties, and those with non-standard construction, such as older timber frame properties, may not be eligible for equity release. This is because at the end of the lifetime mortgage, the provider will regain the money from the sale of your home. They need to be confident that the money they lend you can be made back, and certain types of homes might have limited saleability in the future.
How lifetime mortgages work
Lifetime mortgages are a type of equity release. They work by lending you a sum of money against your home through a secured loan. Lifetime mortgages don’t require any monthly repayments. However, you can make repayments if you wish. Lifetime mortgages also use compound interest, meaning your interest is calculated based on the cost of the loan plus any interest accrued. This means that the amount owed can add up quite quickly, especially without repayments.
A lifetime mortgage is repaid in full when the last borrower passes away or moves into long-term care.
What are the advantages and disadvantages of lifetime mortgages?
The main advantage for many people is the access to tax-free cash, using their home as security. Unsecured loans, such as those you get from the bank, are often lower in value and come with strict repayment rules. A lifetime mortgage means you can often borrow more than with an unsecured loan and the loan is repaid once the last borrower passes away or moves into long-term care.
With a lifetime mortgage, you also remain in your home with no additional costs. Often, the only requirements are to maintain the home and building’s insurance, as well as keeping the home in a good state of repair.
Another advantage of a lifetime mortgage is that some providers offer inheritance protection, where a percentage of the home’s sale can be ring-fenced for inheritance.
However, lifetime mortgages aren’t right for everyone. Retirement is one of the biggest financial periods in a person’s life, so having the best option for you and your circumstances is key.
One of the biggest disadvantages of lifetime mortgages is the compound interest. This means that the interest is calculated based on the loan plus interest accrued. Over time, this can get very expensive and can impact the amount of inheritance you’re able to pass on.
If you have taken a product out that isn’t under the Equity Release Council, then you may also be at risk of negative equity if the sale value of your home is less than the amount owed.
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Disadvantages |
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What is a no-negative equity guarantee?
If you decide to release equity with a lifetime mortgage, the loan is normally repaid from the sale of the property when you pass away or move into long-term care. But there is a risk that your home may sell for less than what you owe.
With a no negative equity guarantee, you won’t have to pay more than the sale value of your home, even if the amount owed is more. It is a way of protecting your loved ones and beneficiaries from having to pay the remaining balance from your estate. No equity release debt will be passed on, so any savings, and other investments can still be inherited.
Equity release providers who have signed up to the Equity Release Council standards agree to offer a no negative equity guarantee. It is worth noting though that there may be circumstances where the no negative equity guarantee does not apply, but your T&Cs should clearly describe this.
What impact does a lifetime mortgage have on means-tested state benefits?
A lifetime mortgage could negatively impact any means-tested state benefits that you qualify for. This is because income and capital are used to decide if you qualify for benefits such as Pension Credit.
If you qualify for state benefits, it is important to consider the effect that a lifetime mortgage may have on your future finances.
What impact does a lifetime mortgage have on inheritance?
Lifetime mortgages must be paid off upon death, either with money from the sale of the property, or other funds. Whatever money is left over in your estate will be distributed to the chosen beneficiaries named in your Will.
Some lifetime mortgage providers offer inheritance protection, where a percentage of the home’s sale can be ring-fenced for inheritance. The amount you are allowed to protect is often capped, and not all providers offer this option. If inheritance protection is important to you, make sure you make this clear when you speak to an adviser, as they’ll be able to find the right products for you.
Need help with equity release?
Releasing equity from your home isn’t an easy decision. For a free and impartial chat, speak to one of our friendly advisers.
You can also order a free equity release brochure.
Types of lifetime mortgages
There are two main types of lifetime mortgages which are lump sum and drawdown. If you have certain medical conditions or lifestyle choices then you may be eligible for an enhanced lifetime mortgage with some providers.
Lump sum lifetime mortgage
Lump sum lifetime mortgages give you all the money in one go. You can then use the money as you wish, whether that’s debt consolidation, home renovations, or a holiday.
Drawdown lifetime mortgage
A drawdown lifetime mortgage doesn’t release all the money at one go, instead you can release the cash over time, as and when you need it. As you only pay interest on the cash you have released, some find this a more effective way to pay for certain purchases. This option could also be a more cost effective way of funding things that are needed in future, rather than taking a lump sum and holding the funds in a bank account.
Enhanced lifetime mortgage
Some providers may offer an enhanced lifetime mortgage if you meet certain criteria, such as being diagnosed with a life-limiting illness or meeting certain lifestyle conditions. With an enhanced lifetime mortgage, you may be eligible for an increased loan amount or a lower interest rate than the standard market.
What fees are involved with a lifetime mortgage
A lifetime mortgage does have fees associated with it, like a standard mortgage. These fees often vary depending on the provider you choose, and whether you use a financial adviser or equity release adviser in the process. You could be charged:
- Advice fee: To cover the equity release adviser’s costs for providing advice for your lifetime mortgage. Fees vary between advisers.
- Arrangement fee: To cover the provider’s costs for setting up your lifetime mortgage.
- Transfer fee: To cover the provider’s costs for transferring the money from equity release to you or your solicitor.
- Legal fee: Independent solicitor’s costs for providing legal advice on your lifetime mortgage. Fees vary between legal advisers.
- Valuation fee: To cover the provider’s costs for valuing your home.
These fees will fluctuate, and could be paid upfront, or once a product has been taken out. See our guide ‘How much does equity release cost?’ for more information.
What are the alternatives to lifetime mortgages?
Lifetime mortgages may not be the best solution for everyone, and there are other ways of freeing up more money for your retirement or making a significant purchase.
Perhaps the most obvious alternative to equity release is to downsize by selling your current home and moving into a smaller or less expensive property so that you can pocket the difference.
A retirement interest-only mortgage is another potential alternative to a lifetime mortgage. With a retirement interest-only mortgage, you borrow a lump sum and pay off the interest through regular monthly repayments. Then, when you pass away or move into long-term care, your home will be sold and you’ll only repay the same amount you borrowed.
What is the difference between a lifetime mortgage and a home reversion plan?
Lifetime mortgages and home reversion plans are the most common types of equity release. Both allow you to stay in your own property and use the money to fund your retirement or pay for living costs. They also allow you to receive cash without the need for regular repayment or the risk of losing your property.
However, there are key differences between a lifetime mortgage and a home reversion plan:
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| How does it work? |
You borrow money from your equity release provider and use your home as security. |
You sell a share of your home’s ownership to the equity release provider for less than the market value. |
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At what age do you qualify? |
Starts from the age of 55. |
Typically starts at 65 but can be lower with some providers.
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| How does the equity release provider benefit? |
Interest is charged on the amount you borrow. This is then compounded as interest on top of interest, so your debt increases over time. |
Your provider buys a share of your home for less than the market value with the aim of selling it at the full price when you die or move into long-term care. |
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What are the risks |
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How much money can I borrow? |
This can be up to 60% of your home’s value, although this could be lower depending on the provider. Your age and the lender’s rules also affect how much equity you can access. Generally, the older you are the more you can borrow. |
Most providers offer between 20% and 60% of the value of the share of your home that you’re looking to sell. |
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What if I change my mind? |
You can opt to pay back a lifetime mortgage, but early repayment penalties are likely to apply. |
Some providers allow you to buy back the share of your home that you sold, albeit at the full market value. |
Applying for a lifetime mortgage
To apply for a lifetime mortgage, you’ll need to go through a qualified equity release adviser. This is mainly because lifetime mortgages aren’t always the best option for you. Instead, there may be an alternative retirement product that works better for you and your circumstances.
If a lifetime mortgage is the right option for you and you choose to proceed with one, then you’ll first go through regulatory checks with the lender. If the regulatory checks are approved, then a surveyor will be sent out to the property to value the home and ensure there are no major concerns with the structure of the property. Then, the survey will be sent to the lender for them to approve. You’ll also need to instruct your own independent solicitor and pay their associated fees. Your solicitor will explain the detailed terms and conditions of the lifetime mortgage to you, so you understand what you are agreeing to. Once these steps are all complete, the lender will instruct its solicitor to transfer the money to you.
FAQs on Lifetime mortgages
While you’ve probably got lots of questions, here’s some of the most popular ones we get asked.
Can you pay back equity release products early?
Equity release providers who have signed up to the Equity Release Council standards agree to allow penalty free payments. This could be partial repayments up to 10% of your loan, for example, but will differ by provider. Read our guide on paying back equity release products for more.
Are you still the registered owner with a lifetime mortgage?
Yes, you are still the registered owner with a lifetime mortgage. Similarly to a traditional mortgage, you own the home but the money to finance the home is from a bank or lender.
Can you be refused a lifetime mortgage?
Yes, you can be refused a lifetime mortgage if you are under 55, and some plans require you to be aged 60 years and above. Some equity release providers also have a maximum age limit, or you may reach a ceiling on the maximum amount you can borrow the older you get.
Also, equity release applications can be refused in cases where the type of property being used as security is not suitable for that specific lender.
However, you won’t usually be refused equity release if you have a poor credit score because your home is used as security rather than credit history. Similarly, your income isn’t normally part of the criteria when deciding equity release as monthly payments aren’t required by the lender.
What if I’m refused equity release?
If one lender declines your application, it may be accepted by another. All providers have their own rules and criteria. Therefore, if a lender refuses your application, you may still be able to secure equity release from a different provider. If you can’t get a lifetime mortgage from any provider, then there may be alternatives available as mentioned above.
Why would a property be refused for equity release?
Properties can be refused for equity release for a range of reasons, including:
- Non-standard construction such as timber-framed homes or prefabricated properties.
- Damp timbers and rot that may require a detailed survey.
- Unusual, quirky designs such as stables, annexes, removed walls, and internal modifications, as well as part-commercial properties.
- Poor maintenance where a home has deteriorated over time and requires significant maintenance such as a new roof.
- Spray foam used in the property as insulation.
- The property being in a high flood risk area.
- Untidy, cluttered properties may put off equity release providers.
- Issues and restrictions with the deeds of the property.
Most of these reasons are linked to the property being able to be sold quickly on the open market. As the property is used as security, providers need to be sure that it will sell quickly so the loan can be redeemed. A lifetime mortgage is designed to run for a long time, therefore your property will also need to be good security in 10 or 20 years.
Are you looking for advice on lifetime mortgages?
At LV= we offer impartial, FCA-regulated whole of market advice that will help you to understand what the right options are for you in your retirement. Why not get in touch with one of our equity release advisers today to receive a free, no-obligation call?
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