What's a Lifetime Mortgage?
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Are you considering unlocking your home’s potential with a lifetime mortgage?
An equity release lifetime mortgage is one of the distinctive types of equity release mortgages that may be your ticket to managing your finances in your golden years.
Did you know that a whopping £6,2 billion was borrowed through equity release plans in 2022 alone?1
In This Article, You Will Discover:
In this article, the Every Investor team will guide you through the world of lifetime mortgages.
Our goal is to provide an easy-to-understand look at how lifetime mortgages work, what the benefits and risks are, and how to work out whether this type of loan could be right for you.
At Every Investor, we’re committed to maintaining the highest standards of accuracy and comprehensiveness. Our researchers rely on multiple trusted sources, including government databases, reputable financial institutions, and official industry reports, spending hundreds of hours analysing the latest equity release news.
Our editorial team fact-checks, proofreads, and quality-checks our content to keep it current and relevant.
Let’s examine the complexities of lifetime mortgages and how a loan like this might be used to access home equity.
What’s a Lifetime Mortgage?
A lifetime mortgage is a type of loan available to homeowners in the UK who are over the age of 55.
You can release a portion of your home’s equity with a lifetime mortgage without selling or making payments (unless you choose to repay part of the loan or interest).
Instead of mandatory monthly repayments, the loan and interest are typically repaid using the proceeds from the sale of your home when you move into long-term care or after your death.
A lifetime mortgage provides a method to access cash from your home equity, but it’s essential to consider the potential impact a loan like this could have on the inheritance you’re able to leave and on any means-tested benefits you may receive.
How Does a Lifetime Mortgage Work?
A lifetime mortgage works by letting you release a percentage of the equity tied up in your home without having to move out.
With a lifetime mortgage, you continue to own and live in your home.
Here’s the nitty-gritty: you take out a loan secured on your property, with the loan amount and any accrued interest repaid when you either pass away or move into long-term care.
How much can I borrow?
Your age and the value of your home will determine how much you can borrow.
You will usually be able to borrow more money if you’re older and your property’s worth more.
A lifetime mortgage calculator can help you determine how much you qualify for.
Keep in mind
Taking out a lifetime mortgage is a significant decision that can have substantial financial consequences, including higher interest rates and potentially reducing the amount of money you can leave to your beneficiaries.
Always consult with a financial advisor before proceeding.
What are the Different Types of Lifetime Mortgages?
The different lifetime mortgage types are typically divided into four categories: lump sum, drawdown, interest-only, and enhanced lifetime mortgages.
Lump Sum Lifetime Mortgage
A lump sum lifetime mortgage is pretty straightforward.
You borrow a fixed amount of money against the value of your home, and the loan plus any accrued interest is paid back when your home is sold, usually when you pass away or move into long-term care.
Drawdown Lifetime Mortgages
Drawdown lifetime mortgages, on the other hand, provide more flexibility.
Instead of getting all the money upfront, you take an initial amount and then ‘drawdown’ further amounts as and when you need them.
This can be cost-effective, as you only pay interest on the money you’ve actually taken.
Interest-Only Lifetime Mortgage
With an interest-only lifetime mortgage, you pay off the interest on a monthly basis, which means the loan amount doesn’t increase over time.
The original loan is then repaid once your home is sold.
This type can be a good option if you have a regular income and want to keep the final repayment in check.
Enhanced Lifetime Mortgage
Finally, there’s the enhanced or ‘ill-health’ lifetime mortgage.
These are designed for homeowners with certain health conditions or lifestyle factors, as a lower life expectancy could allow for borrowing more money or securing a lower interest rate than standard lifetime mortgages would cater for.
It’s important to remember that the suitability of these options depends on your personal circumstances, and you should always seek independent advice before making a decision.
Lifetime Mortgage Rates
Lifetime mortgage interest rates are key factors in calculating loan costs over time and may vary among different lenders and mortgage types.
Here are some things to keep in mind about lifetime mortgage rates:
- Typically, rates are higher than those of regular mortgages because of the long-term nature of the loan and the fact that you might not make any repayments for many years.
- Rates can be either fixed or variable, but most lifetime mortgages have a fixed rate so you know exactly what the loan will cost over time.
- Because the interest will be rolled up, the amount you owe can grow quickly, even with a relatively low rate.
We strongly suggest seeking independent advice to ensure you fully understand the implications of these rates.
Advantages of Lifetime Mortgages
The advantages of lifetime mortgages include the fact that you’ll retain ownership of your home while benefitting from its value.
Here are some potential benefits of lifetime mortgages:
- Access to tax-free funds: A lifetime mortgage can provide you with a lump sum or a series of smaller payments that won’t be taxed, as this money would be a loan and not income.
- No repayments required: You don’t need to make any repayments during your lifetime, which can help you manage your finances and maintain your standard of living.
- No Negative Equity Guarantee: Most lifetime mortgages in the UK come with a “No Negative Equity Guarantee,” which means that you or your estate will never owe more than the value of your home when it’s sold.
- Option to remain in your home: You can continue to live in your home for as long as you want, and the loan and accumulated interest will only be repaid when you die or move into long-term care.
Disadvantages of Lifetime Mortgages
The disadvantages of lifetime mortgages are not to be overlooked, despite the enticing benefits.
Here are some of the potential drawbacks to lifetime mortgages:
- High interest rates: Interest rates for lifetime mortgages tend to be higher than standard mortgage rates, and interest will compound over time if you don’t make repayments, which will increase the total amount owed.
- Reduced inheritance: Taking out a lifetime mortgage will reduce the amount of equity you have in your home, which will impact the amount you can leave to your beneficiaries.
- Impact on benefits: Receiving a lump sum or drawdown payments from a lifetime mortgage can affect your eligibility for means-tested benefits such as the Pension Credit or Council Tax Reduction.
- Early Repayment Charges: if you choose to repay the loan earlier than agreed, you could face substantial early repayment charges.
It’s essential to weigh these potential drawbacks against the benefits before deciding if a lifetime mortgage is right for you.
The Lifetime Mortgage Process
The lifetime mortgage process involves four steps: determining eligibility, completing an application, getting a home valuation and loan approval, and receiving the funds.
Here’s a usual outline of the lifetime mortgage process:
- Finding out if you’re eligible: You generally need to be over 55 and own the property that needs to be your main residence, but different lenders might have their own specific requirements.
- Getting advice and applying, which involves speaking to a qualified equity release broker or advisor, filling in forms, and providing some details about your property and financial situation.
- Having your home valued so your provider can determine how much you can borrow. (The lender will also consider your age and the condition of your health.)
- Receiving the money, either as a lump sum or smaller payments or as a combination of both.
Be patient—this process can take weeks!
Lifetime Mortgage Providers
The best lifetime mortgage providers in the UK are varied, with a range of companies offering different types of plans to suit your needs.
These providers include well-known high-street banks, specialist lenders, and insurance companies.
Some of the leading players in the market include Aviva, Legal & General, and more2life.
Do take note
Each provider offers different products with varying interest rates, loan-to-value ratios, and terms and conditions, so it’s essential to shop around and compare your options.
The Equity Release Council’s strict code of conduct protects consumers, so look for providers who are members.
Legal & General
Legal & General offers lump sum and drawdown lifetime mortgage plans, and the Optional Payment Lifetime Mortgage gives clients the ability to repay some or all of the interest.
Aviva, one of the UK’s largest providers, offers lump sum and drawdown lifetime mortgages, with features like the ability to make voluntary repayments.
Aviva places a strong emphasis on customer flexibility, as evidenced by the fact that customers automatically qualify for downsizing protection after three years.
more2life offers a range of lifetime mortgage products, including options that include inheritance or downsizing protection or the ability to make voluntary payments to manage the loan balance.
This provider also offers tailored plans for individuals with certain medical conditions.
Canada Life provides a variety of lifetime mortgage solutions, including lump sum, and drawdown options with downsizing protection and the potential addition of inheritance protection.
LV= (Liverpool Victoria) offers flexible lifetime mortgages allowing lump sum disbursements and smaller withdrawals.
Just specialises in offering a range of competitive lifetime mortgages that include drawdown and lump sum options.
Pure Retirement offers a suite of lifetime mortgage products including lump sum and drawdown options.
Standard Life provides lump sum and drawdown lifetime mortgages that include downsizing protection to clients who own homes worth at least £99,000.
Nationwide Building Society
Nationwide Building Society no longer offers new lifetime mortgages, but existing plan-holders may switch or borrow more.
How to Choose the Best Lifetime Mortgage Provider
To choose the best lifetime mortgage provider, you could use our quick checklist as a starting point before comparing providers in more detail.
Here are the necessary steps:
- Assess your individual needs and circumstances. This includes the amount of money you wish to release, how you want to receive it, and whether you want the flexibility to make repayments.
- Research different providers to see what they offer: Look at their interest rates, loan-to-value ratios, and any additional features or benefits.
- Check which providers are members of the Equity Release Council, to guarantee that they meet stringent conduct requirements.
- Consider the provider’s reputation too, looking at reviews or ratings.
Once you’ve narrowed things down to a few providers you like, there are some essential criteria you can use to compare these providers.
Regulation of Lifetime Mortgages in the UK
Regulation of lifetime mortgages in the UK is overseen by the Financial Conduct Authority (FCA) and the Equity Release Council (ERC).
Is a Lifetime Mortgage Right for You?
Whether a lifetime mortgage is right for you depends on your financial goals, risk tolerance, and personal circumstances.
It’s important to speak to a qualified adviser who can help you understand the product’s costs, benefits, and risks and determine whether it aligns with your needs and objectives.
A lifetime mortgage provides a method to access cash from your home equity, but it’s important to consider the potential impact on your inheritance, means-tested benefits, and overall financial situation before making a decision.
This article is intended to provide general information about lifetime mortgages and is not to be construed as financial advice. Always seek professional advice before making any financial decisions.
The Future of Lifetime Mortgages in the UK
The future of lifetime mortgages in the UK looks promising despite the effects of recent rate rises, with an ageing population contributing to a growing demand for equity release products.4
The higher rates available at the moment may be discouraging some homeowners from taking out a lifetime mortgage, but data from Key suggest an increase in plans taken out in April and May 2023 as lifetime mortgage rates started to fall.5
Trends & Predictions
Trends and predictions identified and made by lifetime mortgage experts suggest a rise in product flexibility and diversity to meet a wider range of consumer needs.6
There’s also an increased emphasis on clearer, more comprehensive communication to enhance consumer understanding and trust, as evidenced by the ERC’s new guidelines on client communication.7
Innovations & Developments in the Market
This includes tools for comparing products, personalised customer journeys, and more interactive, user-friendly digital platforms for applications and customer service.
Consequences for Consumers
While lifetime mortgages are trending towards increased product flexibility and diversity, the corresponding rise in complexity for consumers is often overlooked, though the Equity Release Council has encouraged providers to adopt standardised ways of posting product fees.11
With so many choices on the market, it’s more important than ever for homeowners to make sure they fully understand all their options and the implications when it comes to certain product features.
For instance, ringfencing a portion of your available equity to benefit from an Inheritance Protection guarantee will mean you won’t be able to borrow a certain percentage that may otherwise have been available to you.
Alternatives to Lifetime Mortgages
There are several alternatives to lifetime mortgages that may be more appropriate depending on your individual circumstances.
Here are some options:
- Downsizing: Sell your home and buy a smaller property to release equity, which may be a more cost-effective option than taking out a lifetime mortgage.
- Savings and investments: You may be able to use other savings or investments to get funds instead of taking out a loan.
- Family assistance: If your family can provide financial aid, it might be a more affordable and flexible alternative to a lifetime mortgage..
It’s important to speak to a qualified financial advisor who can help you understand the pros and cons of each option and determine which is most appropriate for your individual circumstances.
Can I Get a Lifetime Mortgage if I Still Have an Outstanding Mortgage?
Yes, you can get a lifetime mortgage even if you still have an outstanding mortgage.
However, the existing mortgage will need to be repaid using the proceeds from the lifetime mortgage, which can impact the amount you can borrow and the terms of the lifetime mortgage.
It’s important to consult with a financial advisor or a mortgage specialist to understand the implications and explore your options.
How’s a Lifetime Mortgage Repaid?
A lifetime mortgage is typically repaid when the borrower passes away or moves into long-term care.
At that point, the home’s sold, and the proceeds from the sale are used to repay the outstanding mortgage balance, including any accumulated interest.
Alternatively, some borrowers choose to repay the mortgage voluntarily during their lifetime, either partially or in full, which can help reduce the overall amount owed.
Can I Move Home With a Lifetime Mortgage?
Yes, you can move home with a lifetime mortgage.
Lifetime mortgage products approved by the Equity Release Council offer a “portability” feature, which allows you to transfer the mortgage to a new property as long as your new home meets your lender’s criteria.12
It’s important to consult with your lender to understand the specific terms and processes involved in moving your lifetime mortgage to a new home.
What Happens to a Lifetime Mortgage When I Die or Go Into Long-Term Care?
When you die or move into long-term care, a lifetime mortgage is typically repaid.
This is done by selling the property, and the proceeds from the sale are used to repay the outstanding mortgage balance, including any accrued interest.
If there are any remaining funds after the mortgage is repaid, they can be distributed as an inheritance to your beneficiaries.
Are Lifetime Mortgages Regulated?
Yes, lifetime mortgages are regulated financial products.
They fall under the regulation of the Financial Conduct Authority (FCA) in the United Kingdom.
This regulatory oversight ensures consumer protection and sets standards for transparency, fair practices, and appropriate advice throughout the lifetime mortgage process.
What Are The Best High Street Banks Offering Lifetime Mortgages?
The 4 best high street bank lifetime mortgages are:
- Scottish Widows
- Canada Life
- Legal & General Home Finance
A lifetime mortgage may be a suitable choice for homeowners considering using their property equity for financial needs.
When selecting a lifetime mortgage provider, it’s crucial to consider factors such as interest rates, fees, product flexibility, and customer service, and seek independent financial advice.
Comparing rates and fees among providers can help identify the most cost-effective option.
Additionally, it’s important to be aware of how a lifetime mortgage is repaid, the possibility of moving home with the mortgage, and the regulatory framework provided by the Financial Conduct Authority.
By carefully considering these factors, homeowners may make an informed decision and find a lifetime mortgage that suits their individual circumstances, potentially helping them achieve their financial goals in retirement.
Editorial Note: This content has been independently collected by the Every Investor team and is offered on a non-advised basis. While we try & keep the information up to date & correct, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the website or the information, products, services mentioned in the website. Learn more about our editorial guidelines.
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