What's a Lifetime Mortgage?

How Does a Lifetime Mortgages Work in Dec 2021?

Considering a Lifetime Mortgage? There Are a Number of Scheme Types to Consider. Discover All These & Learn Which Option Could Be Right for You.

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What’s a Lifetime Mortgage?

We’ll help you to gain access to hidden equity that’s locked up in your property. We layout all the lifetime mortgage schemes to choose from so that you can enjoy a lump sum or smaller pay-outs of money once you retire.

It’s always a good idea to look at all your options carefully so that you can make an informed decision about which lifetime mortgage to choose. These careful considerations are always useful to discuss with an objective professional to get some advice. Our guide on this type of equity release plan will help you to solve all your financial problems with ease.

9 Types of Lifetime Mortgages Plans

9 Types of Lifetime Mortgages Plans

When it comes to lifetime mortgage plans, they offer tax-free cash release for you to enjoy while you’re retired. At the same time, lifetime mortgage plans also allow you to live in your property after you’ve taken out the plan – meaning you maintain ownership of your property until the plan ends and your provider sells your property.

Best of all:

You have a choice to release all the cash at once as a lump sum or to release small amounts of the money whenever you need it. The smaller release of funds is known as ‘drawdown’.

How are you affected?

If you already have a mortgage you need to repay on your property, the money you release will pay off that mortgage first before you can access more equity. After that, it’s your choice what you do with the rest of the equity that you’ve released.

Simply put…

You can use that cash for anything you want to: buying your dream car, going on that long-awaited overseas trip, doing home renovations, or helping your kids to pay for investment – you have absolute freedom to do as you wish with your mortgage money.

Let me tell you something:

Lifetime mortgage plans give you a variety of choices, making your life so much easier. This is unlike other types of equity release plans. You can now choose from this wide range of options for the perfect one.

Some of these options are:

Lifetime Mortgage

1. Enhanced Lifetime Mortgages

An enhanced lifetime mortgage plan, also known as an impaired lifetime mortgage plan, gives you a reasonable amount of money or low-interest rates compared to the standard lifetime mortgage plans that are out there. This mortgage plan is a lifetime mortgage option that will offer you capital. This capital or equity is tied up, as a manner of speaking, in your home. It’s specifically created for people over the age of 55 that own a home.

Now:

There are some prerequisites to taking out such a lifetime mortgage plan. The property that you want to release equity from needs to be within the UK. Your property needs to be valued at £70,000 minimum.

Best of all!

This enhanced mortgage plan allows you to access more equity and cash if your health is low. At the same time, other lifetime mortgage plans don’t offer this fantastic benefit.

What does this mean for you?

Well, to qualify for this lifetime mortgage plan and you have health issues, listen up. As mentioned before, you’ll be eligible for the enhanced or an ill-health lifetime mortgage scheme if you suffer from pre-existing health conditions, you’re older than 55, and own a home worth more than £70,000 and in it’s the UK.

You might be wondering: What health conditions?

And how does this mortgage plan offer you more when you have health issues? The enhanced lifetime mortgage plan works according to the principle that your life expectancy is probably lowered due to your ill-health. Some of the medical conditions they cover are:

  • Diabetes
    • Parkinson’s disease
    • Multiple sclerosis
    • Cancer and in need of surgery, chemo or radiotherapy
    • High blood pressure
    • Angina, heart attacks, a stroke etc.
    • If you’re a tobacco or cigarette smoker

Simply put:

The weaker your health is, the more cash you’ll be allowed to unlock from your property, and the lower your interest rates will be.

It’s a well-known fact that health issues increase as one gets older, or that’s a fact for many people today. The stats are that at least2/3  retired people suffer from high blood pressure or have had a severe heart attack. Therefore, funny enough, if you have a history of medical illnesses you could be getting added benefits!

Let me tell you something:

It seems to be in your best interest to take out an equity release plan, such as the enhanced lifetime mortgage plan. You’ll gain access to more capital, and you’ll pay much less interest compared to other mortgage plans on the market.

Better yet:

Your provider can use the same backing as annuities, and they’ll use your life expectancy ratio to calculate how much cash you can get out of your equity release plan.

Drawdown Lifetime Mortgages

2. Drawdown Lifetime Mortgages

Drawdown lifetime mortgage plans are the most popular type because they offer a flexible money reserve facility. When you choose this mortgage, you have easy access to your money.

Now:

The drawdown mortgages were first designed as a response to the old plans. The old methods required homeowners to estimate how much they’ll need to release. So, the money was invariably put into a bank account and could earn less interest than the interest being accrued on the equity release scheme.

What does this mean for you?

Taking out a smaller lump sum will be charged less interest and will mean a lower balance for you to settle. Therefore, you’ll be able to get more equity from your property in the future when and if you need to.

Better yet:

With this type of mortgage, you don’t need to repay any new equity release cash in the bank. You can simply pay that to your provider. In return, your provider won’t charge interest on any money you pay them, only when you withdraw funds.

4 Pros Of Drawdown Lifetime Mortgages

  1. You can borrow the exact amount you need with lower interest costs if you compare it to borrowing a big lump sum
  2. Available any time you need it, and you don’t have to reapply
  3. No monthly repayments
  4. No affordability or income tests

3 Cons Of Drawdown Lifetime Mortgages

  1. Your home’s equity will decrease and the inheritance value as well
  2. Higher interest rates compared to other mortgage plans
  3. The interest rate may differ on future withdrawals compared to earlier withdrawals and your original lump sum
Lump-Sum Lifetime Mortgages

3. Lump-Sum Lifetime Mortgages

A lump sum is a form of payment. It’s a large sum of money paid as a single installment, rather than repaying in smaller amounts more regularly. When it comes to loan vocabulary, people also refer to it as a bullet repayment. Equity release plans, for example, can be repaid as a lump sum when you pass away, or in monthly installments.

Now:

If you need a one-off release of cash, this is the best mortgage option for you. The Lump Sum Lifetime Mortgage is known as a core lifetime mortgage financial product and has few bonus features – meaning you’ll pay a lower interest rate.

How does it work?

Well, the Lump Sum Lifetime Mortgage works by giving you the option to choose how much cash you want to release from your property. This option will solve your immediate financial needs but won’t pay out again in the future, of course. This secure loan against your property is a tax-free lump sum at a fixed interest rate, usually.

Best of all:

Most providers won’t require you to make monthly repayments. If you don’t make repayments, interest will accrue over time, and your loan balance will be ever-growing.

Interest-Only Lifetime Mortgages

4. Interest-Only Lifetime Mortgages

Some people are worried about interest rolling up. If that’s you, interest-only lifetime mortgages are an excellent way to go.

Simply put:

You make month-to-month interest payments. If you’re able to do this throughout the life of your mortgage, you won’t be charged additional interest when it ends. So, only the first amount of money you borrowed will be charged interest.

Let me tell you:

People who earn a reliable extra salary and prefer to pay their lifetime mortgage plan to prevent rolled-up interest like this mortgage plan. With this mortgage, you can get as much equity from your property as possible. Those who aren’t eligible for a residential mortgage once they retire also take out an interest-only mortgage plan. It’s very similar to the residential interest-only mortgage plan.

4 Pros of Lifetime Interest-Only Mortgages

  1. Your loan amount decreases as you pay off interest
  2. It maximises the money in your home and your heirs’ inheritance
  3. There aren’t any affordability or income checks
  4. Sometimes you can change to a roll-up plan if you don’t want to make monthly payments

4 Cons of Lifetime Interest-Only Mortgages

  1. You’ll have to repay the interest rates with your salary monthly
  2. Early repayments are penalised
  3. Your inheritance will be worth less
  4. Your state means-tested benefits may be affected
Income Lifetime Mortgages

5. Income Lifetime Mortgages

As its name states, this type of mortgage works by paying you a monthly pension top-up, if you will. It pays out a set amount monthly.

Better yet:

It’s a great way of supplementing your retirement salary so that you can maintain the same quality lifestyle after retiring. It’s the best alternative if you don’t need a big sum of money. If that were the case, instead go with a lump sum lifetime mortgage.

Voluntary Repayment Lifetime Mortgages

6. Voluntary Repayment Lifetime Mortgages

Are you worried about safeguarding your estate for an inheritance? Do you want to be able to control your mortgage plan? If that sounds like you, a voluntary repayment lifetime mortgage is the one for you.

How does it work?

Well, a voluntary repayment plan offers you flexibility. When you take out this mortgage, you’ll be able to make ad hoc interest repayments. You are also in control of the remaining equity that you released.

Best of all:

Instead of your loan’s interest rolling up, the optional repayment plan allows you to repay up to 15% of your original loan amount annually. It all depends on your provider, but most of them won’t penalize you for repaying in an ad hoc manner.

Buy to Let (BTL) Lifetime Mortgages

7. Buy to Let (BTL) Lifetime Mortgages

Do you want to take out a loan against a buy-to-let property? If you are, you can consider a buy-to-let (BTL) mortgage plan.

Simply put:

It’s specially designed to help landlords develop their BTL housing portfolios. If you’re a landlord of a buy-to-let property, this option can gain you profit for your retirement and save you money on tax arrangements as well.

Moreover, you must be 55 years or older (90 max) to qualify for this mortgage. The property you want to borrow against needs to be in the UK. Lastly, your property must be worth a minimum of £70,000 but not more than £6 million.

And the best part is this:

You can choose a lump sum, as roll-up, or as a voluntary payment, all on a buy-to-let basis. That being said, we advise that you talk to a financial adviser because all plans have different benefits and drawbacks you’ll need to be aware of.

Retirement Mortgages

8. Retirement Mortgages

As you might know, borrowing money from residential mortgage providers can be challenging at times. Most traditional providers don’t want to offer you a mortgage if you’re at the age of retirement. That’s why the retirement mortgage plan is so great. It provides you many reliable and flexible plans to choose from.

Let’s have a look…

The retirement mortgage is usually a loan taken out against your property before you retire or if you’re already retired. It’s also the general rule that you won’t have to repay that mortgage before you die. However, you’ll need to repay the cash or interest as your provider requires. This repaying will help to level your loan balance.

What does this mean for you?

Well, if you want to get some cash during your retirement, this retirement mortgage is your best deal.

Retirement Interest-Only Mortgages

9. Retirement Interest-Only Mortgages

If you’re nearing the end of your work life and entering into your retired life, you might need some extra money. And, it might be difficult to renew your interest-only mortgage, even if you’ve successfully met its monthly repayments faithfully.

Other financial assistance options include this retirement interest-only mortgage. It’s one of the best option =s on the market because it lets you unlock the money tied up in your home.

Good news:

You only have to repay the interest monthly, and not the loan itself.

Now that we’ve looked at the nine types of lifetime mortgages on the market let’s look at the other kind of equity release – home reversion.

Lifetime Mortgage Plans VS Home Reversion Plans

There are a few essential differences between these two options that you need to know about. However, the two main things to remember about lifetime mortgages are:

  • You remain the owner of your home.
  • The fixed interest rate compounds over time.

The two main things to remember about home reversion plans are:

  • You’ll sell a part of your home to release money that’s locked up in it.
  • Interest doesn’t build up.

Simply put:

Lifetime MortgagesHome Reversion Plans
You release tax-free money from your home.You release tax-free money from your home by trading some or all of your property with your providers.
You remain the owner of your home.You can own a part of your home and live there without paying rent.
You don’t need to make monthly repayments (even though you can choose to). Interest is added to your loan balance.You don’t need to make any monthly repayments. There’s no interest to pay either.
Interest adds to your mortgage. The mortgage plus all interest gets repaid after your provider sells your property.Your provider owns some of your property. So, they’ll get that percentage of the profit.
Early repayment is taxed and penalized.If you want to buy back the part of your home you sold to your provider, you’ll need to pay the full market value. Mostly, that’s a higher number than the original amount you sold it for.

How Is Interest Calculated On A Lifetime Mortgage?

Most lifetime mortgages have fixed interest rates. This means that the interest rate won’t increase or decrease during your plan, no matter what happens economically. Even if the Bank of England gets into trouble or if your provider goes up in flames. When you make monthly payments, your total interest will decrease annually. Your provider needs to explain their interest rates to you because all provider differs in these rates.

In other words…

The amount of interest you pay at the end of your equity release depends on how long the scheme runs and the type you choose. It’s important to remember that this will come to an end when you are ready to sell your land or move into permanent care.

Let me tell you something.

With a limited lifetime mortgage, because you don’t make any monthly repayments as the plan goes on, it affects the lending rate results as it compounds quickly. Each year the interest due is added to the overall loan, and from then on, it accrues more interest. This means that what you owe can increase quite quickly over time.

For example, if you have a set interest value of 6%, an equity release account will grow twice the size after roughly 12 years. At 5% it can take about 14 years to duplicate.

What can you do about it?

  • Be mindful of signing up for a plan with a “no negative equity” guarantee since it will ensure that what you owe to the lender can never exceed the value of your estate.
  • Take out equity from your lifetime mortgage in instalments, via a drawdown rather than an initial lump sum. You can lower the amount of interest you will pay in the future.

If you take out a lifetime mortgage, you will generally be charged a higher interest rate than you would on an ordinary mortgage, and the amount you owe can multiply if the interest is rolled up.

Now:

Lifetime mortgages are designed as a long-term arrangement with repayment made on the sale of the borrower’s home when they die or move into long-term care. Some lenders will waive the early repayment charge for those who settle their lifetime mortgage because of a residence change. Some lenders will allow it to be repaid when the first borrower dies if the remaining borrower wishes to move and redeem the lifetime mortgage.

Listen to this…

If you have a home reversion plan, you can decide to buy back your estate or a share in this but will need to pay full market value for it.

Let me just add:

Looking at the current interest rate of 2.25%, one could assume that it’s much cheaper than in the past. It’s at an all-time low. The average growth in the UK property market might outstrip equity release costs. Even though different providers have different rates, it’s still much lower than it used to be!

Remortgaging A Lifetime Mortgage To A Lower Rate Could Save You Thousands

As mentioned earlier, interest rates on lifetime mortgages have decreased drastically over the past few years. Depending on your individual circumstances, you can save a significant amount of money by changing to a lower-rate lifetime mortgage.

How To Protect The Value Of Your Property

All lifetime mortgage providers who are members of the ERC1(Equity Release Council) have a ‘no negative equity guarantee. It protects you so that you don’t pay more than you owe to your equity release provider. However, when your lifetime mortgage plan comes to an end, the lender will sell your house and settle the loan amount plus any interest.

And:

If the estate market value decreases and the money can’t repay your mortgage, the lender won’t request more cash from your estate or heirs. Since you’ll be protected by the ‘no negative equity guarantee’, they aren’t legalized to do so. Therefore, consider the equity release firm that will offer you this protection.

Now:

An interest-only lifetime mortgage can also help manage the total amount owed as you repay all or some of the interest monthly.

How Much Do I Need To Repay Monthly On My Interest-Only Lifetime Mortgage?

Once again, it’s up to you how much interest you want to pay monthly. However, the amount must meet your provider’s terms and conditions. There aren’t formal affordability tests done for this type of lifetime mortgage, but you should ask your equity release adviser how much is sensible to repay each month.

It’s so important!

Always discuss any changes to your salary, the value of the estate you’ll leave behind, and the balance of your lifetime mortgage loan.

Common Questions

What's the Difference between Equity Release & Lifetime Mortgages?

What's A Lifetime Mortgage?

What Lifetime Mortgage Types Are There?

Is Lifetime Mortgages The Best Equity Release Option?

In Conclusion

After reading all you need to know about the equity release type Lifetime Mortgages, you’ll most likely be able to decide if it’s the right choice for you. Most people prefer lifetime mortgages because it offers so many varieties to suit your specific lifestyle and circumstances.

The beautiful thing is that you have time on your hands to make the right decision for yourself and your family. For more information, please don’t hesitate to ask us anything. We’re here to help.

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Editorial Note: This content has been independently collected by the EveryInvestor advisor team and is offered on a non-advised basis. EveryInvestor may earn a commission on sales made from partner links on this page, but that doesn’t affect our editors’ opinions or evaluations. Learn more about our editorial guidelines.
  1. The Reverse Mortgage: A Strategic Lifetime Income Planning Resource
    2015 The Journal of Retirement Volume: 3, Issue: 2, pp 61-79 DOI: 10.3905/JOR.2015.3.2.061
    Tom Davison 1,Keith Turner 2 123
  2. An exploratory analysis of payoffs for the lifetime mortgage of farming assets and its policy implications
    2018 Agricultural Economics-zemedelska Ekonomika Volume: 60, Issue: 9, pp 406-419 DOI: 10.17221/189/2013-AGRICECON
    Gil H. Park ,Deokho Cho 12
  3. The Consequences of Mortgage Credit Expansion: Evidence from the 2007 Mortgage Default Crisis
    2009 Quarterly Journal of Economics Volume: 124, Issue: 4, pp 1449-1496 DOI: 10.3386/W13936
    Atif Mian ,Amir Sufi
    University of Chicago 12345
  4. Responding to the Housing and Financial Crises: Mortgage Lending, Mortgage Products and Government Policies
    2011 European Journal of Housing Policy Volume: 11, Issue: 1, pp 23-49 DOI: 10.1080/14616718.2011.548585
    Kathleen Scanlon 1,Jens Lunde 2,Christine M. E. Whitehead 1
    1 London School of Economics and Political Science ,2 Copenhagen Business School 12345
  5. PROSPECTS FOR THE DEVELOPMENT OF EQUITY RELEASE PRODUCTS IN POLAND – REVERSE MORTGAGE FROM A CULTURAL PERSPECTIVE
    2013 Real Estate Management and Valuation Volume: 21, Issue: 2, pp 5-12 DOI: 10.2478/REMAV-2013-0011
    Piotr Zbrojewski
    University of Łódź 1234
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