Lifetime Mortgage: A Guide to Releasing Home Equity

A lifetime mortgage can be a great way to release some of the equity from your home, but it's essential to understand how it works and what the benefits and risks are.

You can borrow up to 55% of your home's value, but this can vary depending on your age and the type of property you own.

A lifetime mortgage is a type of secured loan that uses your home as collateral, allowing you to borrow a lump sum or receive regular payments.

The loan is typically interest-only, meaning you won't have to pay back the amount borrowed until the end of the term, usually when you pass away or move into long-term care.

Consider reading: Lifetime Equity Release

A lifetime mortgage allows eligible homeowners to withdraw some of their home equity in cash.

To be eligible, you must be aged 55 or over and either fully or part-own the property you live in. You'll still be the owner, and responsibility for keeping it in good condition will sit with you.

Taking out a lifetime mortgage typically takes around 8 weeks from initiating the process to receiving your cash on completion.

There are several steps you'll need to take before you can take out the product: consult with a financial advisor, submit your equity release application and instruct your solicitors, get your property valued, and get your offer and legal checks done.

Some lifetime mortgages allow you to make regular or ad hoc repayments to help reduce costs, but interest usually is rolled up and repaid when the home is sold.

You won't need to pay off your loan until you move into permanent care or die. Even then, the loan will be repaid from the sale proceeds of your home.

Here are the general steps involved in taking out a lifetime mortgage:

Most reputable equity release products come with a no-negative equity guarantee, which means you will never owe more than what the home is worth when sold.

A lifetime mortgage can provide tax-free cash to supplement your retirement income, pay off existing debt, or cover major expenses. You can use the money as you see fit, whether it's for home improvements, helping children buy their first property, or increasing your income in retirement.

One of the benefits of a lifetime mortgage is that you can continue living in your home for as long as you like, with no monthly payments required toward the loan. This means you can stay in your home until you die or move permanently into long-term care.

You can also withdraw equity tax-free, giving you flexibility to use the money as you see fit. Some lenders may even allow portability, meaning you can take your lifetime mortgage with you if you move to a different property.

However, it's essential to consider the potential drawbacks of a lifetime mortgage. The interest can build up quickly, and there may be cheaper ways to borrow money. Additionally, releasing equity with a lifetime mortgage will reduce how much you can leave as an inheritance.

You might enjoy: L&g Lifetime Mortgage

Here are some key points to consider:

It's also worth noting that receiving funds through a lifetime mortgage could have a negative impact on your eligibility for government aid, including the pension credit.

To qualify for a lifetime mortgage, you must be at least 55 years old. This age requirement applies to both parties if you're applying with a co-borrower.

Your home must meet certain requirements, including being your main residence, located in the UK, and in reasonable condition. You must also own it free and clear.

The property must be valued at least £70,000, and certain types of properties may not be eligible, such as studio or basement flats, flats in a local authority block, retirement properties, and more.

You'll need to undergo a financial assessment, which takes into account your age and the value of your property. The percentage you can borrow typically increases with age, and some providers may offer larger amounts for those with certain medical conditions.

See what others are reading: Commercial Property Mortgages

Here's a summary of the key eligibility requirements:

Fees can vary widely, so it's essential to compare them across different plans and providers to find the most affordable option.

There are several types of lifetime mortgages, including Interest Roll Up Lifetime Mortgage, Optional Payment Lifetime Mortgage, and Payment Term Lifetime Mortgage. Each type has its own requirements and features.

The Interest Roll Up Lifetime Mortgage is available to those 55+, with a minimum property value of £70,000 or £100,000 for flats, maisonettes, or specific types of properties.

Here are some key features of different types of lifetime mortgages:

You can also consider making voluntary repayments to reduce your loan balance and avoid paying more interest in the long run.

A Lifetime Mortgage is a type of loan that allows homeowners to release equity from their property without having to move. There are different types of Lifetime Mortgages available, including Interest Roll Up Lifetime Mortgage, Optional Payment Lifetime Mortgage, and Payment Term Lifetime Mortgage.

Recommended read: Interest Only Lifetime Mortgage

The age requirement varies between these types of loans, with some starting at 55+ and others at 50+. The minimum property value considered also differs, with some requiring a minimum of £70,000 or £100,000 for certain types of properties.

Here are the main differences between these types of loans:

A Retirement Interest Only mortgage is another type of loan that allows homeowners to release equity from their property. This type of loan requires monthly interest payments, but the full amount of the loan isn't usually repaid until the homeowner dies or moves into long-term care.

Consider reading: Interest Only Home Mortgage Loans

Interest-Only loans are a type of residential mortgage that allow you to pay the interest off monthly, but the full amount of the loan isn't usually repaid until you die or move out of the home.

You can also consider Retirement Interest Only mortgages, which are loans secured against your home, allowing you to tap into your equity and make interest-only payments toward the loan each month.

If this caught your attention, see: 0 Interest Housing Loan

Making interest-only payments can be beneficial as it means less debt to repay later, but it's essential to ensure that the payments are affordable for you.

With an Interest-Only Lifetime Mortgage, you would make interest payments toward the loan during your lifetime, and the amount you pay would be designed to fit your income.

You can replace an existing loan with a larger new one and take out some equity in cash through refinancing, which is another option to consider.

You can repay a lifetime mortgage in various ways.

One option is to make voluntary repayments, which means paying amounts during your lifetime to reduce your loan balance. This can be done within certain thresholds, and you may not be charged penalty fees for repaying your lifetime mortgage early.

Making voluntary repayments can be beneficial as it means there will be less for you or your heirs to repay later. For example, a couple mentioned in the article wanted to help themselves, their children, and their grandchildren, and using a lifetime mortgage allowed them to do so.

You can also consider making interest-only payments, which would be due monthly and designed to fit your income. This means paying some of the interest now, which would reduce the debt to repay later.

Another option is to pay off the loan early, but be aware that a lender may impose an early repayment charge for doing so. It's essential to review your agreement and understand the terms before making any decisions.

Here are some repayment options available:

It's crucial to consider your options carefully and review your agreement before making any decisions.

If you do decide to move, you'll have the right to take your equity release plan with you to a new home, subject to criteria at the time.

You can repay your loan in full without an early repayment charge if your new property doesn't meet the lender's criteria.

Downsizing protection typically applies after five years of taking out your plan, which is a common timeframe for many people to reassess their living situation.

You'll need to get advice from a qualified equity release adviser before applying for a lifetime mortgage, as it's a regulatory requirement to ensure you find the right plan for your needs.

This adviser will help you navigate the process and make an informed decision about your equity release plan.

The amount you can borrow with a lifetime mortgage varies depending on your age, health, and the value of your home.

Most providers will offer a fixed percentage of your property value based on your age, and the older you are, the more money you can borrow.

Homeowners with certain medical conditions may be able to borrow larger amounts, either presently or in the past.

Some lenders may offer larger sums to people with medical issues, such as high blood pressure or diabetes.

The lowest amount you can borrow is not specified, but the lowest amount you can release is £10,000.

The average amount people can release is £78,334, according to the Key Market Monitor 2023.

Related reading: Pre Approved Home Loan Amount

You'll usually need to pay for independent legal advice when setting up a lifetime mortgage. This is a necessary step to ensure you understand the terms and conditions of the loan.

Some organisations, like debt charities such as StepChange, provide free advice. However, this is not always the case, and you should be prepared to pay for professional guidance.

In addition to legal advice, you may also need to pay various fees, including an arrangement fee, a completion fee, and for a valuation of your property.

Check this out: Does a Reverse Mortgage Pay off Your Existing Mortgage

Interest rates can significantly impact the amount you owe on a lifetime mortgage.

The example provided shows that an interest rate of 4% would result in a total owed of £60,833 after five years.

At 5%, the total owed would be £63,614 after five years, which is £3,219 more than at 4%.

At 6%, the total owed would be £66,911 after five years, which is £4,297 more than at 4%.

Here are the total owed amounts for each interest rate after five, 10, and 15 years:

Fees can be a bit of a shock, but it's good to know what to expect. You'll likely need to pay for independent legal advice, which is a must-have when it comes to equity release.

Some organisations, like debt charities such as StepChange, offer free advice, so it's worth exploring those options. However, you'll still need to pay for other fees associated with setting up a lifetime mortgage.

An arrangement fee and a completion fee are two costs you might incur. You'll also need to pay for a valuation of your property, which is a necessary step in the process.

Here's a quick rundown of the fees you might need to pay:

It's worth noting that some lenders might charge additional fees, so be sure to ask about those when you're shopping around.

The interest on your mortgage can be a significant cost. It's one of the most important factors to consider when taking out a lifetime mortgage. The interest that you pay on your mortgage is likely to be the most significant cost, and it can add up quickly.

Broaden your view: Rocket Mortgage Cost to Refinance

An interest rate of 4% can result in a total owed of £60,833 after five years, £74,013 after 10 years, and £93,423 after 15 years when borrowing £50,000. This is just an estimate, but it gives you an idea of how quickly the interest can add up.

If you opt to roll up the interest, you'll need to consider how this will affect the total amount you owe. The example above shows how the total owed can increase significantly over time. At an interest rate of 5%, the total owed would be £63,614 after five years, £81,522 after 10 years, and £104,046 after 15 years.

The Annual Equivalent Rate (AER) and Annual Percentage Rate (APR) can give you a better understanding of the interest rate and how it will affect your mortgage. The AER shows what the interest rate would be if the interest compounded each year, while the APR shows the cost you pay each year to borrow money, including fees, expressed as a percentage.

Here's a comparison of the total owed at different interest rates:

Keep in mind that these are just estimates, and the actual interest rate and total owed may vary.