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Home Finance Equity Release: what it is & how it works How Does a Lifetime Mortgage Work?

How Does a Lifetime Mortgage Work?

Most people using an Equity Release scheme choose a Lifetime Mortgage. A Lifetime Mortgage allows you to access money that is locked in to the value of your property.

A Lifetime Mortgage can be useful for people who need access to the wealth stored in their property immediately and is an alternative to selling a family home to access funds. Common reasons for choosing a Lifetime Mortgage might be to cover the cost of home improvements, supplement a pension, or to cover ongoing care costs.

lifetime mortgage

What is a Lifetime Mortgage?

A Lifetime Mortgage is the most common type of Equity Release. As with a traditional mortgage, a Lifetime Equity Release Mortgage is a loan against the value of the property. 

The older the homeowner is and the greater the value of the property, the larger the sum that can be borrowed. There is no time limit or end date to the loan, which is only repaid when the property is sold.

There are two different ways of taking your money with a Lifetime Mortgage; either as a single lump sum, or smaller sums over a period of time with a ‘drawdown’ or ‘flexible’ Lifetime Mortgage. As interest is only ever charged on the money that you actually release, a Drawdown Lifetime Mortgage can make sense for homeowners wanting to supplement pension income, or meet regular bills such as paying for care.

Who is eligible for a Lifetime Mortgage?

To take out a Lifetime Mortgage, you must be at least 55 years old. If the homeowner already has a mortgage on their property, then it must be repaid either before the equity release is finalised, or from the actual equity release funds on completion.

Most providers have a minimum home value that they are prepared to allow people to remortgage to Equity Release, which tends to be £70,000.

Different types of Equity Release Lifetime Mortgage

Once you’ve decided between a one-off cash sum or a drawdown Lifetime Mortgage, you then need to consider interest options. The interest can either be rolled-up or paid in consistent regular payments, as an interest-only Lifetime Mortgage.

Rolled-up Interest Lifetime Mortgage

This is by far the most popular option for retired homeowners on a fixed pension, as it means that the borrower does not have to make any monthly payments to the lender. Instead, interest is added to the loan amount each month, or year, depending on the lender. The outstanding balance is only repaid (that is the original loan, plus accrued interest) when the property is eventually sold. 

As interest rates are typically fixed for life, a financial adviser can show you what the eventual debt may be, based on average life expectancy.

If you do opt for a rolled-up interest Lifetime Mortgage, many offer the opportunity to make occasional lump sum repayments, often from very small amounts from just £500 upwards. This can be a very popular way of keeping the loan balance under control, whilst allowing you flexibility over how much to repay, and how often.

Interest-only Lifetime Mortgage

If rolling-up interest isn’t for you and you can afford to make consistent regular payments, then you may prefer an interest-only Lifetime Mortgage. This option allows you to pay back a fixed amount of the interest on a monthly basis. 

Some lenders are very flexible in allowing you to choose how much interest to pay, typically from as little as £25 monthly, all the way up to 100% of the interest being charged. That way you can set a regular payment amount that you feel is affordable and comfortable. Any interest that is not paid back will begin to ‘roll-up’, as with a roll-up interest plan.

Lifetime Mortgage considerations

You should think carefully about your situation before deciding to take out a Lifetime Mortgage.

Make sure that you are aware of the pros and cons and it is always advisable to seek the services of an Independent Financial Advisor before taking out a Lifetime Mortgage.

lifetime mortgage considerations

Below we have detailed the advantages and potential drawbacks of taking out a Lifetime Mortgage.

Advantages of a Lifetime Mortgage

Money to make home improvements

A Lifetime Mortgage can mean the difference between having to sell and downsize, and staying in the home you love. Many homeowners use Equity Release to make improvements and adaptations, so that they can continue live in their home safely.

Because you retain ownership of your own home, you can benefit from any future increase in its value, once the loan has been repaid.

You can transfer the Lifetime Mortgage to another property that meets the lender's criteria at the time

If you decide you want to sell and move home, the lender will allow you to transfer or ‘port’ the Lifetime Mortgage to another property, provided that it is satisfactory to them.

If the new property is of lower value, it may mean that you have to make a partial repayment to keep the loan within the lender’s limits. However, they cannot impose any penalty for making an early repayment.

Potential Drawbacks of a Lifetime Mortgage

Reduced value of your overall estate

Taking out a Lifetime Mortgage will reduce the value of your overall estate, as the lender will be repaid from the sale proceeds of the property. If you intend leaving anything in a Will to loved ones, you may wish to inform them of your decision to take Equity Release. That way it doesn’t come as a surprise.

Interest added if you don't make monthly or lump sum repayments

If you don’t make any repayments, interest added to the loan will increase the amount you have to eventually repay. 

Entitlement to means-tested benefits may be affected

Money released from a Lifetime Mortgage may affect entitlement to certain means-tested benefits, such as Pension Credit, Council Tax Reduction, or Local Authority Direct Payments toward care costs. A good financial adviser will explain how to avoid falling foul of this.

Early Repayment Charges

Lifetime Mortgages are designed to last until you die or move into care, so cancelling a loan early can mean you incur a penalty, or ‘Early Repayment Charge’.

Many Lifetime Mortgages avoid this, by having exemptions should certain events happen. For example, some loans for joint borrowers can be repaid without early repayment charges within three years if one of the home owners pass away or move into care.

Other lenders provide ‘downsizing protection’ and Early Repayment Charges are waived if you decide to move to a new home after a set period, and wish to repay the whole loan amount.

Lifetime Mortgage Rates

Lifetime Mortgage interest rates are an important consideration when thinking about Equity Release, as this determines the overall amount that will need to be paid back to the provider. Rates are usually fixed for life, so your financial adviser can show you how much you might end up owing depending on how long the loan runs for. 

Rates vary widely, depending on how much equity you want to release. Those borrowing smaller sums may get the lowest rates (from over 2% presently), whereas someone wanting a larger amount may expect to be charged over 5 or 6% presently.

To find out more about Lifetime Mortgage rates, look at our page on the cost of Equity Release. This page also includes a free Equity Release Calculator that requires no personal details.

Can I be refused a Lifetime Mortgage?

When applying for an Equity Release Lifetime Mortgage, a lender will primarily assess four things in order to determine if you are eligible. 

1. Your property

The property's location, construction type, environmental factors. For example - proximity to industrial sites, electricity pylons and flood-risk.

2. Your creditworthiness

Although a lender won’t want any details of your income or credit commitments, they will run a credit check to make sure that you aren’t registered as being bankrupt. If you have any debt problems, like an IVA, Debt Management Plan or County Court Judgement, they may insist that it is repaid from the Equity Release before any money left over is paid out to you.

3. Your purpose for the money

Lenders are pretty relaxed about what you do with their money, so long as its for a genuine reason. For example; paying off a mortgage, home improvement, holidays or helping the family. Lenders are expected to lend responsibly by their regulator – the Financial Conduct Authority (FCA), meaning that they will want to know what your intentions are. Some have rules about not being able to use the loan for buying overseas property, and none will lend for anything they consider to be overly risky, such as gambling or investing in the stock market.

4. Who actually owns and lives in the property

Lenders require that all owners be named on the mortgage. But what if you are not married or in a Civil Partnership, and only one of you is on the deeds? In this case, some lenders will not accept an application, whereas other will, requiring that the person not on the deeds signs a ‘Deed of Consent’ waiving their legal right to occupy the property, in the event that their partner dies or moves into care.

If one lender won’t accept your application, another one might well do. For example, some lenders limit flat-roof areas to no more than 25% of a property’s roof, whereas other will go up to 50%. This is why it is best to seek advice from an independent adviser, so they can match your circumstances to the most suitable lender.