A lifetime mortgage is the most popular type of equity release plan in the UK, and involves taking out a long term mortgage on your home that does not need to be repaid until you die or go into long-term care and your property is sold.
According to the Equity Release Council, 2023 saw nearly 26,119 new lifetime mortgages agreed, although this was nearly half the number agreed the previous year, with steeper interest rates dampening enthusiasm for this type of product.
A lifetime mortgage can be used for a number of different reasons including:
- To boost your income
- To clear an existing mortgage – perhaps an interest only mortgage that is ending
- To fund home improvements
- To enable you to gift money to your loved ones before you die
As you are taking out a mortgage that is secured against the value of your home, a lifetime mortgage should not be entered into lightly and won’t be suitable for everyone. You will need to seek professional financial advice before taking out any form of equity release product – see below for more information.
If you’re looking for somewhere to start, you can get expert advice from an independent equity release specialist with Unbiased. They’ll listen to your needs and talk you through your options, so you can decide if equity release is the right option for you.
What is a lifetime mortgage?
The two main differences between a lifetime mortgage and a standard mortgage is that for many lifetime mortgages, you do not need to make any monthly payments and you only need to repay the debt when you die or go into long term care.
Whilst not having monthly payments can be attractive from a budgeting and cashflow perspective, it means that interest will be compounded. This means it is charged on both the amount borrowed and also the previous interest due, so the total amount owed can grow quickly and eat up a large part of your property’s value over time.
It’s essential when considering equity release that you only use a provider who is a member of the Equity Release Council, the industry trade body who sets certain minimum product standards. One of their membership requirements is that you (or your beneficiaries) will never owe more than the value of your property. This is known as a ‘no negative equity guarantee’ which essentially caps the amount you could end up owing and is essential for peace of mind. Find out more about some of the safeguards that the Equity Release Council has put in place in our guide Is equity release safe?
When you die or move into long-term care, your lifetime mortgage provider will normally expect your home to be sold and any proceeds from the sale will be used to pay off the loan and any interest that has accumulated. Anything left after the loan has been repaid will remain the property of you, or your estate, and if your beneficiaries can pay off the mortgage without having to sell the property they can usually do so.
Different types of lifetime mortgages
With continued house price growth over the last few decades and so much of the UK’s wealth tied up in property, there has been a significant amount of product innovation in the equity release space in recent years. This has led to a number of different types of lifetime mortgage becoming readily available. Some of the main types include:
Regular interest payments vs adding interest to the loan amount
You can choose to roll-up interest and repay it along with the amount you borrowed when your home is eventually sold. With this type of product you don’t have to make any regular payments which can be attractive from a monthly cash flow and budgeting perspective, although since March 30, 2022, consumers have had the right to make penalty-free repayments when they want, subject to lender criteria. Find out more in our guide Can I repay equity release or a RIO mortgage early? The downside of not paying anything back is that it will result in the total amount you owe growing each month, potentially significantly over time, which will reduce the amount you are able to leave your family or loved ones when you die.
You can also increasingly find lifetime mortgages that allow you to repay the interest on your loan to avoid it accumulating over time. This means you do have to continue making regular payments to your mortgage provider, but importantly it stops the amount you owe building up over time. These types of lifetime mortgages are remarkably similar to another type of mortgage product called a retirement interest-only (RIO) mortgage – where you pay interest on the loan, but don’t have to repay the amount borrowed until you die or go into long term care. You can read more about retirement interest-only mortgages and how they work here and about the differences between these and lifetime mortgages in our guide What’s the difference between a lifetime mortgage and a retirement interest-only mortgage?
Lump sums, flexible drawdown or a regular income
The equity release and lifetime mortgage markets have evolved to offer you similar options to those available when taking your personal pension. For example, you may be able to choose from the following:
A lump sum – as the name implies, this is where you draw down the full amount you want to borrow in one go. This can be the simplest approach, but if you are not paying the interest on the loan each month, the amount can grow relatively quickly as the interest compounds over time.
Drawdown – some products offer a flexible drawdown product where you take only what you need at the start, but you can draw down additional money as required over time. If you plan to roll-up the interest on your loan, and only pay it at the end, this flexible drawdown approach can reduce overall borrowing costs significantly as you only owe interest on the money you actually need. This can be a helpful approach if you plan to use equity release to top up your income.
Enhanced lifetime mortgages
In a similar way to buying an enhanced annuity with your pension, some lifetime mortgage providers will offer more money to those with lower-than-average life expectancies due to a medical condition, or certain lifestyle factors such as being a smoker.
Lifetime mortgages - what are the costs and charges?
The biggest cost of a lifetime mortgage is usually the interest you will owe on the amount you borrow. For plans where you do not make regular interest payments, this amount can be substantial. Here are a couple of examples to illustrate how this works, although note that we have ignored the impact of fees and charges in this illustration for simplicity.
If you want to get a sense of how much a lifetime mortgage might cost over 10, 20 or even 30 years, this lifetime mortgage calculator can give you an estimate. Fill in a few details and it will allow you to compare the costs of a lifetime mortgage where you are making monthly interest repayments vs instead choosing to roll up the interest without making any monthly repayments.
Lifetime mortgage interest example 1 - Richard
Richard borrows £30,000 at the age of 60 through a lifetime mortgage interest rate of 6%. He chooses to roll up the interest and pay it only when he dies or moves into long term care. If he moves into long term care and sells his house at the age of 80, then the total amount repayable will be £99,594 (made up of the £30,000 loan he borrowed and £69,594 of accumulated interest).
In this same example, if Richard was able to make monthly interest payments on the loan – a sum of £150 per month – then he would only have to repay the £30,000 he borrowed at the outset when he sells the house to go into long term care. The total cost of borrowing would have been lower at £66,000 – made up of the £30,000 loan he borrowed and a reduced amount of total interest owed of £36,000 which he has been paying off monthly.
Lifetime mortgage interest example 2 - Sue
Sue borrows £50,000 at the age of 75 through a lifetime mortgage interest rate of 6%. Again, Sue chooses to roll up the interest and pay it only when she dies or moves into long term care. If she moved into long term care and sold her house at the age of 85 then the total amount repayable would be £91,101 (made up of the £50,000 loan she borrowed and £41,101 of accumulated interest).
If Sue was able to make monthly interest payments on the lifetime mortgage – a sum of £250 per month – then when she moves into long term care she would have to repay the £50,000 she borrowed at the outset. The total cost of borrowing would have been lower at £80,000 – made up of the £50,000 loan she borrowed at the outset and a reduced amount of interest of £30,000 which she has been paying off monthly.
Other fees and charges
In addition to the interest payable, it is vital to understand any fees and charges that might be payable, for example:
- An advice fee to the financial advisor who recommends a suitable product and helps you take out the loan
- Arrangement fees due to the product provider
- Property valuation fees
- Legal fees such as a solicitor or conveyancer
- Buildings insurance – providers will insist on you maintaining appropriate buildings insurance to protect the property
- A completion fee
- Any early repayment charges – if you wanted to pay the loan off early
- A regular maintenance budget to maintain the property in reasonable condition
These costs will vary but could add up to between £1,000 and £3,000.
Is a lifetime mortgage right for me?
Equity release products are not suitable for everybody and it will depend on your age and personal circumstances. It’s important to understand that they can have implications for tax, benefits, inheritance and your long-term financial planning.
You will need to speak to a professional financial advisor before you can take out a lifetime mortgage. They will help you understand if it is appropriate for your personal circumstances and recommend a suitable product for you. They’ll also be able to tell you how much your lifetime mortgage is likely to cost.
If you want to get a sense of how much a lifetime mortgage might cost over 10, 20 or even 30 years, this lifetime mortgage calculator can give you an estimate. Fill in a few details and it will allow you to compare the costs of a lifetime mortgage where you are making monthly interest repayments vs instead choosing to roll up the interest without making any monthly repayments.
Your age
If you plan to roll up the interest you owe, and pay it only when you die or move into long term care, then the younger you are the longer you would expect to live in your home and the longer you would therefore accumulate interest payments over. This can have quite a significant impact on the total amount owed.
Benefit entitlements
Taking a lump sum out of your home through a lifetime mortgage will affect your entitlement to any means tested benefits such as Universal Credit, Housing Benefit or Pension Credit. Any money taken out is classed as ‘capital’ in any calculations for means tested benefits which can reduce, or stop your eligibility entirely.
Read more about how lump sum payments and savings can affect means-tested benefits.
Inheritance planning
The loan you take out, and importantly the amount of any interest rolled-up over time could significantly reduce the value of any inheritance you are able to leave your loved ones.
Maintenance and insurance
Whilst you still own your home with a lifetime mortgage, most mortgage lenders will expect you to maintain your property in a reasonable condition and maintain valid buildings insurance in place to protect the property. It’s also worth understanding if there are any other conditions that your lender wants to put on you living in your home.
Ability to move home
It’s important to understand whether your mortgage is portable and will allow you to move home if you want, or need to. Products from members of the Equity Release Council, the trade body for the equity release sector, are essentially portable, but will still come with certain restrictions – for example the new property will need to meet their standard property requirements and be of standard build for example. The property value in relation to the loan will also need to be acceptable to the lender. It’s also important to understand what fees and charges will be payable if you do move – for example arrangement fees and valuation fees.
Early repayment charges
Some lenders may not allow you to repay your lifetime mortgage early, and if they do there may be hefty fees involved so its vital to understand what early repayment charges may be applicable.
No negative equity guarantee
If you choose to roll up the interest you owe and pay it only when you sell the property, the total amount you owe can grow significantly. This could even mean that you (or your beneficiaries) would end up owing more than the value of your home. This can be easily prevented by using a provider who has signed up to the Equity Release Council which sets a number of minimum product standards to protect borrowers such as a no negative equity guarantee. To protect yourself, it’s essential to only use a provider who has signed up to be a member of the Equity Release Council and follows its code of conduct.
Getting advice on equity release
If you’re considering a lifetime mortgage, it’s a requirement from the financial services regulator, the Financial Conduct Authority (FCA), that you speak to a qualified financial advisor to help ensure that this type of scheme is suitable for you and you are aware of the risks involved.
A good financial advisor will understand your circumstances and help recommend a suitable product from a member of the Equity Release Council (ERC).
If you’re looking for somewhere to start, you can get expert advice from an independent equity release specialist with Unbiased. They’ll listen to your needs and talk you through your options, so you can decide if equity release is the right option for you.
Otherwise if you’re looking for more information on equity release before you speak with anyone, you might find the following articles helpful.