April 29, 2022
Lifetime mortgages have become a popular way to release equity from your home. Senior citizens are choosing this option now more than ever. Our guide explains what lifetime mortgages are, how they work, their advantages and disadvantages, and more.
What Is a Lifetime Mortgage?
A lifetime mortgage is a loan secured against the value of your home. This financial product is available to homeowners aged 55 and older who have 100% ownership of their homes.
Lifetime mortgages allow homeowners to release the equity from their homes, i.e., borrow money tax-free. Owners can receive the money in one lump sum or via a series of payments and are free to continue living in their homes. But the best aspect about these loans is that they don’t need to be repaid until the homeowner dies or moves to a long-term care facility.
With lifetime mortgages in the UK, a borrower only needs to pay interest on the borrowed amount, not on the total property value.
|DID YOU KNOW? Fixed-rate mortgages are a popular way of borrowing. But when first offered in 1971, they had an interest rate of 7.5%, which managed to rise to 20% in 1980. In 2020, mortgage rates reached an all-time low, making this year the perfect time to obtain a mortgage.|
How Does a Lifetime Mortgage Work?
Lifetime mortgages don’t require repayments. The loan is repaid once the owner has moved out. When this occurs, the mortgage provider will sell the property, pay off the loan (with accumulated interest), and divide any remaining money among the beneficiaries of the owner’s will. If the income from the estate can cover the debt without selling the property, the mortgage provider will take this course of action.
A lifetime mortgage is different from other mortgage types in terms of interest. As there are no mortgage repayments, interest is charged on an increasing sum (loan amount + accumulated interest), which can quickly lead to debt accumulation.
Conditions of a Lifetime Mortgage
A lifetime mortgage explained includes a few additional conditions. Most lifetime mortgages come with a fixed rate of interest. Some lenders may offer variable-rate mortgages, but this is riskier, and borrowers tend to avoid it.
But the Equity Release Council ensures that the debt accrued by a lifetime mortgage never exceeds the value of the property—known as a ‘no negative equity guarantee’. And you’re permitted to ring-fence a portion of the property to leave as an inheritance to your family.
Another essential condition for lifetime mortgage approval is that the borrower must be at least 55 years old, and those over 60 are even better suited.
What Is a Lifetime Mortgages for Over 60s?
People aged 60 and above have greater chances of being approved for a lifetime mortgage and can also borrow more money. The older the borrower, the higher the loan. The life expectancy grows shorter with the age of the borrower—so lenders are willing to give out more money, knowing they’ll get it back sooner rather than later.
So how much can I borrow on a lifetime mortgage if I’m over 65? Those over 65 can receive between 25% and 30% of the available equity, while even older borrowers can get as much as 50%. Depending on the lender, you can also borrow a minimum amount of £10,000 to £45,000. A lifetime mortgage is easily attainable and flexible, and you can even get a mortgage with a CCJ to your name.
|DID YOU KNOW? Brits have a significant amount of mortgage debt. The numbers from 2021 show that the average debt amounts to £137,934 per household. In 2022, mortgage approvals have decreased significantly (87%) due to the COVID-19 pandemic.|
Lifetime Mortgage Types
Upon understanding lifetime mortgages and how they work, consider the following two different types.
Interest Roll-Up Mortgage
What is a lifetime mortgage with regards to payout options? Borrowers can receive the payout in one of two ways. With an interest roll-up mortgage, borrowers receive the money either as a lump sum or regular payments. Regardless of the payout they choose, interest is added to the total loan amount. The borrower doesn’t need to make any payments towards the mortgage because the interest is ‘rolled up’ for the duration of the mortgage and paid when the home is sold.
How do lifetime mortgages work with an interesting-paying mortgage? The latter functions a bit differently than the other lifetime mortgage type. With this type of mortgage, borrowers receive the money in a lump sum but make either ad-hoc or monthly payments, which stops the interest roll-up. Some lenders might also allow their customers to pay off some of the capital, but the remainder is paid off with the sale of the home.
|DID YOU KNOW? The UK mortgage market is one of the world’s largest, with approximately 1.1 million outstanding mortgages worth around £1.3 trillion.|
Pros and Cons of Lifetime Mortgages
The question ‘what is lifetime mortgage’ needs to include the advantages and disadvantages of this mortgage type.
- Tax-free borrowing
- Can freely spend the money
- No repayments (unless otherwise decided)
- Can stay in your home
- No negative equity guarantee
- Interest quickly increases
- Inheritance reduced
- Early repayment charge (ERC)
- Higher interest rates
- Can affect pension benefits
|DID YOU KNOW? Remortgages are popular among the British public. From July 2018 to June 2019, there were 469,000 homeowner remortgages in the UK. Out of these, 238,000 were refinancing remortgages, and 231,000 were equity withdrawn remortgages.|
|Lifetime mortgages are loans secured against the value of the borrower’s home.|
|A lifetime mortgage is repaid when the property owner dies or moves to a long-term care facility.|
|People over 55 become eligible for a lifetime mortgage. But the older the borrower, the larger the loan amount.|
|There are two lifetime mortgage types: interest roll-up mortgage and interest-paying mortgage.|
|A lifetime mortgage can be repaid before its expiration, but there’s an early repayment charge (ERC).|
Paying off a Lifetime Mortgage
As previously noted, lifetime mortgages in the UK are quite popular, but there is some concern about repaying them. Many wonder if they would be able to pay off such mortgages. This depends primarily on the lender, but you should generally be able to pay off the mortgage. The type of lifetime mortgage you choose is also crucial for your ability to pay off the loan. If you select an interest-paying mortgage, you’ll be allowed to pay off the interest and possibly some capital.
Can You Pay Off a Lifetime Mortgage Early?
Before you start the mortgaging process, remember that lifetime mortgages aren’t designed to be repaid early. So if you take this course, you’ll most likely be charged. Some lenders might allow you to repay your lifetime mortgage early, but they’ll probably impose an early repayment charge.
|DID YOU KNOW? Tracker mortgages have been gaining popularity in the UK. These mortgages track the base rate of the Bank of England—so a mortgage’s interest rate changes each time the base rate fluctuates.|
When Is a Lifetime Mortgage the Right Choice?
Obtaining a mortgage is a big financial step. First, you need to determine whether a lifetime mortgage is suitable for you and your circumstances. Our lifetime mortgage advice should help you decide when it’s a good idea to apply for such a mortgage.
Generally, getting a lifetime mortgage is wise if you:
- are more than 55 years old.
- have a steady income.
- have a retirement plan.
- own a home worth at least £70,000.
- have an inheritance.
So the question of ‘how does a lifetime mortgage work’ includes meeting these conditions. But it’s a good idea to first talk to your family or consult a financial adviser. After which, you can apply for this type of mortgage.
|DID YOU KNOW? In the UK, there are age restrictions on mortgage applications. Those over 50 and 60 already have fewer options than younger applicants, but the choices become even more scarce for those aged 70 and over. But this also depends on the lender and the repayment period.|
Lifetime Mortgage vs Equity Release
A lifetime mortgage and equity release seem very similar at first glance. Once the lifetime mortgage is explained, you can learn how equity release works. A lifetime mortgage is one of the two types of equity release financial products; the other is a home reversion plan.
An equity release is an umbrella term to describe lifetime mortgages, but its scope encompasses more than just lifetime mortgages.
|DID YOU KNOW? An equity release comes with a set of rules, which states that the maximum loan amount cannot exceed 55% of the home’s value, but it could be significantly less, depending on the borrower’s age, health, and lifestyle.|
What is lifetime mortgage and its advantages? Such a mortgage is essential if you wish to take a tax-free cash path. Hopefully, our guide has managed to explain all the aspects of a lifetime mortgage so that you can go into this venture fully informed.
The main disadvantages of a lifetime mortgage include an interest increase over time and a reduced size of your inheritance.
You’re permitted to sell your home even if you have a lifetime mortgage. But if the new property has less market value, you might need to repay a portion of the mortgage.
What is a lifetime mortgage in relation to an equity release? These are essentially the same thing. The only distinction is that a lifetime mortgage is a type of equity release.
Some lenders might allow you to pay off a lifetime mortgage, but most apply an early repayment charge (ERC)—meaning that it will cost you money to repay your mortgage.