To make sure we always provide you up-to-date information, this page was last reviewed on 1 October 2020.
If you are looking for some extra cash income in retirement, you may be considering releasing equity from your home.
The most popular type of equity release in 2020 is a lifetime mortgage. The money you get from lifetime mortgages might help you pay for care, help out a younger family member who is struggling financially, or help you pay for home improvements.
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This article guides you through the ins and outs of lifetime mortgages. It answers some of the most frequently asked questions about lifetime mortgages and tells you:
- What a lifetime mortgage is and how it works
- The way lifetime mortgages are regulated
- The different kinds of lifetime mortgage on offer
- The most important pros and cons of lifetime mortgages
- The lending criteria you have to meet in order to qualify for a lifetime mortgage
- How to compare lifetime mortgages
What is a lifetime mortgage?
Lifetime mortgages are a popular type of equity release where you take out a loan secured against the value of your home. This later life equity release scheme allows you to unlock money that is currently tied up in the value of your property.
How does a lifetime mortgage work?
Depending on the product you select, the money you receive from the loan will either be a tax-free cash lump sum, or a series of smaller withdrawals from a reserve savings account.
You do not need to sell your home when you take out lifetime mortgage plans. You will be able to continue living in your house until the end of the mortgage term, which is either after your death or once you have moved into long-term care.
There are also no required monthly repayments to be made towards interest. However, lifetime mortgages for pensioners do have a fixed interest rate for life. You can read more about lifetime mortgage interest rates below.
Instead of making monthly repayments, the loan and all the interest will simply be repaid at the end of the mortgage term. At this point, your house will be sold and the proceeds will be put towards paying off the amount you borrowed, plus interest.
Here is a short video explaining how a lifetime mortgage works.
Is it regulated?
All equity release products are authorised and regulated by the Financial Conduct Authority and Equity Release Council, who build protections into the plans. For example, the Equity Release Council has a no negative equity guarantee which promises that lifetime mortgage customers will never owe more than the total value of their property.
Because the plans are regulated by financial trade bodies, you can feel less worried about how the equity release you choose will affect your family.
However, it is important to note that all kinds of equity release schemes may impact how much you are taxed in the future, as well as your entitlement to means-tested benefits. Contact a specialist adviser to receive more personal advice on how releasing equity could affect pensions and other benefits.
What are the different types of lifetime mortgage?
There are several different types of lifetime mortgages available. Below are the key facts and advice about each kind of product.
An independent financial adviser will be able to give you more detailed information about each type of life time mortgage, and answer any questions you may have about how each product would work in your individual circumstances.
When you release equity with a lump sum lifetime mortgage product, you receive a large, one-off tax-free cash lump sum at the start of the mortgage term. The exact amount of money you receive depends on your age, your property’s value, and the loan-to-value (LTV) percentage your provider offers its customers.
After you get the one-off payment, interest begins to roll up on the loan. This means that interest is calculated every month by looking at the total amount that you owe: i.e. on the initial loan amount in addition to however much interest has already been added.
This is why lump sum lifetime mortgages are sometimes called ‘roll-up’ mortgages.
In a drawdown lifetime mortgage, you are able to release equity from your property in stages. Because of this, having a mortgage with a drawdown facility can help top up your pension income.
The money you choose not to withdraw will be held in a special reserve bank account. You can request to withdraw from this account as and when you need the extra cash.
Interest will only roll up on the amount you actually borrow. This means that you might not have as much interest to pay off at the end of the term.
So, if you choose a drawdown mortgage you can more easily control your debt and have more options for controlling your finances.
Flexible plans allow mortgage customers to make ad-hoc monthly payments toward the interest that is accumulating on their loans. These monthly payments are not compulsory, and you can choose to pay or not pay as and when you can afford it.
The payments are a good idea for those who are worried about the costs of a lifetime mortgage, and would like to reduce their debt with a monthly repayment from their pension or savings.
If you do decide that you would like to make interest payments, you will be able to repay a maximum of 15% of the initial loan each year.
An enhanced lifetime mortgage is like a standard plan, except that your medical records are also considered when calculating how much you can borrow.
If you are found to be in ill-health, you will be able to borrow a larger sum of money from the providers.
An independent financial adviser can help you put together your application, and talk you through which options might be best for your personal situation in retirement.
What is the maximum age for a lifetime mortgage?
There is usually no maximum age for lifetime mortgages. This is because lifetime mortgages are targeted towards people borrowing in later life, while they are in retirement.
However, there are strict lending criteria that you must meet to be eligible to borrow money from the lender using a lifetime mortgage. See the list below.
Do I qualify?
Providers have certain legal eligibility requirements that you must meet to use their services. These lending criteria are:
- You have to be at least 55 years old. If you are making a joint application, both homeowners must be 55 or over.
- You must own a property in the UK which is in good condition.
- Your property must be worth at least £70,000. Your property’s value will impact how much you are able to borrow with the plan, and will affect the interest rate that you get from the lender.
- You must not have any existing loans secured against your home. All debts of this type that you have before taking out your lifetime mortgage plan must be repaid completely once you get the cash from your new loan.
- It is also a legal requirement that you seek financial advice from an independent, specialist adviser. You must get this financial advice before signing any deals with a lifetime mortgage provider.
Some providers will not accept sheltered housing, houses next too or above commercial premises, or listed buildings. This is because properties of this type are harder to sell after the end of the mortgage term.
How to compare lifetime mortgages
As explained above, there are several types of lifetime mortgage: roll-up, drawdown, flexible, and enhanced. Different mortgage providers may call the plans by different names, which can make comparing lifetime mortgages feel confusing.
Talk to a specialist adviser
Each lender has different loan-to-value (LTV) percentages and interest rates, and some products give you the option of adding extra features to your plan, such as Inheritance Protection.
It is therefore very important to get advice from life mortgage consultants and a financial adviser before making any decisions about which plan is right for your needs. This is a legal requirement.
The advisor will be able to support you in finding the best option for your family’s needs. They will also be able to answer any other questions you have about the products on offer.
Use an equity release calculator
Another tool that can help you compare lifetime mortgages is an online lifetime mortgage calculator.
These calculators are free to use, and can be a very helpful way to get more information about the maximum amount of money you could get from equity release.
You will usually need to provide the following information for lifetime mortgage calculators to work:
- Your UK address or postcode.
- The value of your main residence. The property your loan will be secured against must be worth at least £70,000.
- Whether or not you have any other outstanding mortgages to pay off.
- Your age. You must be at least 55 years old to take out a lifetime mortgage product.
- Your gender.
- Your marital status.
The calculator will analyse the basic personal information you provide in order to give you a free instant quote. It does this by checking how much cash someone of your profile can usually unlock from their home with different lenders.
If you provide your name and contact details, you may later be sent a more personalised quote.
What is the average interest rate on a lifetime mortgage?
When considering the benefits and disadvantages of the different lifetime mortgage services, it will be helpful to know the average interest rates in 2020.
The cheapest lifetime mortgage providers have interest rates starting at between 2.5 and 3% AER. However, you will find that some companies charge higher rates for lifetime mortgages, usually between 4 and 6% AER.
The rate you get will depend on factors such as your age, whether or not you are applying as a single or joint applicants, and any extra features included in the product.
The interest on lifetime mortgages is usually fixed for life. This can mean that the amount of debt you will eventually pay off after your death can grow very quickly. The cost of a lifetime mortgage can, therefore, end up being very high.
A financial adviser can give you more advice about popular schemes and the interest rates on offer. Speaking to am independent specialist can reduce the worry surrounding the choice you make.
Who are the main lifetime mortgage companies in the UK?
There are 14 members of the Equity Release Council, and 12 of these companies offer lifetime mortgages:
- Canada Life
- Legal & General
- Nationwide Building Society
- Pure Retirement
- Responsible Lending
- Scottish Widows
All 12 of these lifetime mortgage providers are authorised and regulated by the Financial Conduct Authority. You can read more advice about the features and the pros and cons of the different lenders here.
Because equity release services in the UK are regulated, people considering unlocking money from their property can feel safe doing so. For example, the ERC builds a no negative equity guarantee into each member’s plans.
This means that regardless of the company you choose, you will never need to pay off more interest than the total value of your property at the end of your mortgage term (which is either after your death or once you move into long-term care).
The pros and cons of a lifetime mortgage
There are several key pros and cons that you should take care to know.
What are the advantages?
- One of the major benefits is that the money you get will be tax-free income.
- If you choose a lifetime mortgage product with a cash facility, you will be able to withdraw extra cash from a special reserve bank account when you need it to top up your pensions and retirement income. Interest will only roll up on the money that you actually release from your house, so the costs of a drawdown product might be cheaper.
- You will not be required to make any monthly interest repayments. However, if you select a flexible product you may choose to pay off interest monthly when you can, in order to keep the debt under control.
- The Equity Release Council regulates all equity release schemes. You will never owe more than the value of your home.
What are the disadvantages?
- Equity release may impact how much you are taxed. It might also affect your eligibility for means-tested benefits like pension credit both now and in the future.
- You will need to sell your house after the end of the mortgage term in order for the loan to be fully repaid. So, your loved ones will not be able to inherit your house, as it will be sold after you move into long-term care or die.
- Lifetime mortgages are a lifelong commitment. It is very difficult to stop your plan early. You will incur an Early Repayment Charge if you decide you want to do this.
- The amount of money you can get will be calculated according to on a percentage (LTV) of your home’s total market value. An average LTV is between 25 and 35%, so you get much less capital than your house would normally cost.
- The interest rate is fixed for life. Your plan might not let this interest be repaid early, so your debt can increase rapidly. You should consider the impact this will have on your family in your inheritance and estate planning.
- You will not be able to take out any other loans secured against your home.
- There may be additional costs when applying. For instance, it is a legal requirement that you seek professional, independent advice before signing any deal for these products. You may also need to pay a fee for the valuation of your property.
Other articles about lifetime mortgages that you may find useful
Drawdown Lifetime Mortgage
A drawdown lifetime mortgage is a type of life mortgage where you can release equity from your home in a series of small withdrawals. This is instead of simply withdrawing one large cash lump sum at the start of the mortgage term.
Lifetime Mortgage Rates
The majority of lifetime mortgages have a fixed interest rate for life. Therefore, they are sometimes called a ‘lifetime fixed rate mortgage’. The rate will range between providers and can change quite often..
Mortgages For Pensioners
If you are a pensioner in later life, you may be considering a lifetime mortgage as a way of supplementing your pension income, paying off debts, supporting family, or paying for home improvements in retirement.
Lifetime Mortgage Providers
The Equity Release Council trade body has 14 members. These lifetime mortgage providers are authorised and regulated by the Financial Conduct Authority. They all abide by the ERC’s no negative equity guarantee.
Home Reversion Plan
A home reversion plan is a scheme where you sell all or part of your home to a mortgage company in return for tax-free cash. The money you release with a home reversion scheme can either be a cash lump sum or a regular income.
Home Reversion Calculator
A home reversion equity release calculator is a tool that helps you find out how much money you could receive with home reversion plans. These are different from lifetime mortgage calculators that you often see.