What Is A Lifetime Mortgage And Should I Get One?

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What Is A Lifetime Mortgage?

A lifetime mortgage is a tax-free loan available to UK homeowners older than 55.

It’s a form of equity release where the mortgage is secured against the value of your home, provided you legally own the house and it’s your main residence.

These types of cash loans allow homeowners access to much-needed funds – tied up in their home’s equity – without having to move or sell their homes.

How Does a Lifetime Mortgage Work?

A lifetime mortgage is a cash loan secured against the value of your home.

The products allow homeowners to borrow money – calculated as a percentage of their property value – which is paid out as a lump sum or as a drawdown facility.

While homeowners do not have to repay the loan, they are charged interest on the loan amount. This interest is added to the overall loan value.

In the event that the homeowner moves into long-term care and sells their house, the loan provider claims the outstanding amount (including that accrued interest) from the selling price. The remainder is then paid into the seller’s bank account.

If the homeowner passes away and the house is sold, the loan provider claims the outstanding loan amount (with accrued interest added) from the selling price. The remaining is then paid into your estate and distributed to your beneficiaries.

Types Of Lifetime Mortgage Loans

Loan providers offer homeowners two types of lifetime mortgages:

1. Drawdown lifetime mortgage

With this mortgage, you can access the funds in stages, as needed. It’s a great option if you do not know how much money you will initially need. If you require more money in the future, you can access more funds.

2. Lump sum lifetime mortgage

With this option, the loan is released to your bank account in one lump sum. This equity release works best for homeowners who need a large amount of cash immediately.

Benefits Of Lifetime Mortgages

Gives you access to cash without having to sell your home: These mortgages are a great solution for homeowners who need funds urgently but can’t afford to sell their homes. The home remains your property, and you get to stay in it until you sell it or permanently move into a retirement home.
No monthly repayments: You do not have to make any monthly loan repayments. However, interest (at a fixed rate) is added to the loan amount. The loan amount (plus its accrued interest) is due to the provider when you pass away or sell the house.
Lifetime mortgages are tax-free: These mortgages do not have any tax obligations. The tax-free cash is made available to homeowners in full.
Flexible loans: As mentioned, you can have the loan (at a fixed interest rate) paid as a once-off lump sum or in smaller, spread-out amounts.

Drawbacks Of Lifetime Mortgages

The cost of the loan will increase over time: The equity release is subject to lifetime mortgage interest rates. These interest charges increase the overall amount that needs to be repaid to your loan provider. The outstanding loan amount can be substantial, especially if you do not make any of the monthly repayments.
Reduces your inheritance: Because the loan amount (plus accrued interest) is due when selling your house or you pass away, a substantial equity release can take away a large amount from your family’s inheritance.
Reduces your chances of qualifying for other financial products: Banks and other loan providers will be reluctant to offer you other loans or facilities if you’ve already put your house up for surety.
Affects your eligibility for means-tested benefits: These lifetime loans can affect whether you are eligible for means-tested state benefits.
Early repayment penalties and charges: If you decide to pay off your loan early, you may be liable for early repayment charges. If you know you’ll pay off your lifetime mortgage early, choose a loan with a fixed early repayment charge to minimise the penalty fees.

Eligibility Criteria To Qualify For A Lifetime Mortgage

Loan providers use the following criteria to grant these loans:

You must be 55 years or older
You must own the house and/or have a small outstanding existing mortgage
You must reside in the home and use it as your main residence

Choosing The Lifetime Mortgage That’s Best For You

Consider the following when you’re looking at taking out a lifetime mortgage:

The type of mortgage: Choose between the two available equity release options.
The interest rate: Compare the different interest rates offered by banks or loan providers.
Relevant fees: Though these loans are a form of tax-free cash, you will pay interest on your outstanding loan amount. Equity release loans are also subject to various fees, including validation, legal, and administration fees. Therefore, choose your loan based on how much it will cost you overall.
Equity protection guarantee: Loan providers registered with the Equity Release Council offer a no-negative equity guarantee that protects the homeowner’s equity. This is especially important for homeowners who are concerned about a loan impacting their family’s inheritance.