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A‌ ‌Guide‌ ‌to‌ ‌Lifetime‌ ‌Mortgages‌ ‌

No impact on credit score

Pete Mugleston

Author: Pete Mugleston - Mortgage Advisor, MD

Updated: August 6, 2021

We’ve put together a detailed guide to lifetime mortgages that will give you all the information you need about these retirement products. With this knowledge at your fingertips, you’ll be well positioned to decide whether this is a type of borrowing that suits your needs and requirements.

What is a lifetime mortgage?

Lifetime mortgages are a form of equity release loan that allows you to unlock a proportion of money held within the value of your property. Your home is used as security for the loan, which does not need to be repaid until you either die or go into a long-term care facility.

Lifetime mortgages are available to you if you are aged 55 or older. The money raised can be used for anything you wish, typically; holidays, medical care, family gifts or home improvements.

A lifetime mortgage, as with all other types of loan, allows you to retain 100% ownership of your property. With a home reversion plan a provider buys a percentage of your house in return for which you receive a tax-free lump sum and the right to stay in your home, rent free, for as long as you live or move into long-term care. You do not have any repayments or interest to pay.

How do they work?

A lifetime mortgage allows you to borrow money against the value of your main residence whilst still retaining full ownership of the property. The lender will use your home as security for the mortgage.

The money you have borrowed can be released to you in one of two ways:

A drawdown facility will allow you to take portions of the money as and when you require it. This is particularly useful if you want to use the money from the lifetime mortgage in order to top up your retirement income.

Whereas traditional mortgages have a fixed term for the debt to be repaid, what you borrow from a lifetime mortgage is only repaid either when you die or when you enter a long-term care home (hence the name). At this point your property will be sold and the proceeds will be used to repay the debt.

In the event of your death, once the house is sold and money repaid to the lender, any remaining equity will be returned to your estate and distributed to beneficiaries in accordance with your will. If sufficient monies exist to repay the debt without selling the property this is also an option available to the trustees of the will.

How interest is paid on a lifetime mortgage

There is no requirement for regular payments of either capital or interest to be made for a lifetime mortgage unless on a voluntary basis. All interest accrued is added to the outstanding balance and repaid when the property is eventually sold.

Unlike repayment mortgages, where the debt will gradually decrease throughout the term, with a lifetime mortgage your debt increases as the interest rolls up and, thus, so does the interest payments. If you use a drawdown facility you will only accrue interest on the money you have taken out rather than the whole amount.

In order to avoid increasing the overall debt some lenders offer a repayment option to service the interest during the life of the mortgage. Fixed rates of interest or rate caps are quite common for lifetime mortgages available from lenders who are members of the Equity Release Council.

Eligibility criteria

Lifetime mortgages are available to anyone over the age of 55 who owns their own property in the UK and is resident within the UK for at least six months of the year. Security for the mortgage will only be taken against your main residence.

Age requirements

Most lenders have no maximum age at the end of the term because the mortgage remains open until either the applicant dies (or in the case of a joint lifetime mortgage, the last living applicant) or they go into long-term care.

However, some lenders do have a maximum age of either 80 or 85 at the outset and may wish to verify that the applicant is capable of making a decision to borrow money at this stage of their life.

How to get a lifetime mortgage

Here are a few simple steps to help you get started with your application…

  • Gather the necessary documents: You will need your paperwork for your pension income, loans or credit cards, buildings insurance and council tax.
  • Speak to an expert: Speaking to a professional before taking equity release of any kind is essential. This will ensure that you understand the full implications of this type of borrowing and have considered the alternatives. We work with lifetime mortgage experts and can match you with one for a free, no-obligation consultation today.
  • Application: Once you’ve consulated with your advisor, they will guide you through the next steps, should you choose to proceed. This will be a formal application with an equity release provider, but you won’t need to search the market for one yourself. The advisors we work with have access to every equity release provider on the market, and they will introduce you to the one who is best positioned to offer you a good deal.

Make an enquiry and we’ll introduce you to a lifetime mortgages expert to get you started.

Types of lifetime mortgage

There are a number of different types of lifetime mortgage to choose from, with the way interest is charged and how you receive your equity setting them apart.

The main types are…

Lump sum interest roll-up

This is the most traditional type of lifetime mortgage where you take all the money as a tax-free lump sum at the outset. There’s absolutely no requirement to make any repayments for the rest of your life. All of the interest owed is accrued on top of the initial amount borrowed and the full amount is only repaid either when you die or if you move into a long-term care home.

Income drawdown

Sometimes referred to as a flexible lifetime mortgage, with this option you’re able to take a small amount at the outset and then take further money from the original capital borrowed as and when required. This option is quite popular amongst those who are looking to use this facility as a way of adding to their retirement income.

You only accrue interest on the amounts you have withdrawn, which should make this type of lifetime mortgage much less costly than taking all the money at the outset.

Interest repayment

Rather than allow interest to simply build up on top of the original amount borrowed, this type of lifetime mortgage allows for some, or all, of the interest payments to be serviced during the lifetime of the applicant to ensure the overall debt remains at the same level.

It’s possible some lenders will want to conduct an affordability assessment to ascertain if an applicant receives sufficient regular income in order to cover the payments for this option.

Enhanced lifetime mortgages

By analysing the health and lifestyle of an applicant, a few select lenders are able to offer enhanced terms where poor health can clearly be evidenced.

Enhanced lifetime mortgages work along similar lines to enhanced annuities to assess the life expectancy of an applicant, which may result in the availability of higher loan-to-value thresholds and reduced interest rates.

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How much can I borrow?

With lifetime mortgages affordability isn’t really a factor at all because there are no regular payments required in order to repay the debt and your property is used as security.

Your age, your health and the value of your property are the main factors that will impact how much you can borrow for a lifetime mortgage. The older, and less healthy you are, the more you are able to borrow. An 80 year old applicant, long since retired, will be able to borrow a lot more than a healthy 55 year old who may still have many years of work left in them.

A minority of lenders require a medical health assessment to be carried and will want to review an up-to-date doctor’s report. This will only be necessary if it’s an enhanced plan, in which case the medical reports will form the basis for how high the loan-to-value will be for a particular applicant.

Your property will also require an appropriate valuation before the lender approves the mortgage. Any home must be deemed sellable and adequate security for the loan.

Loan-to-value ratios (LTV)

As with affordability criteria for traditional mortgages, the eligibility criteria for lifetime mortgages will differ from lender to lender. Depending upon the factors outlined above, most lenders will offer a loan to value (LTV) ratio of 50%, some will offer 55% and a few will go as high as 60%.

If you’d like to find out more about how much you can borrow for a lifetime mortgage, get in touch and we can arrange for an expert to contact you directly.

Speak to a lifetime mortgage broker

Seeking professional advice before you apply for a lifetime mortgage is vital. It’s important that you understand the full implication of equity release before pressing ahead, and the right advisor can make sure that’s the case. What’s more, they can guide you through the application process and make sure you end up with a deal that’s right for you.

We offer a free advisor-matching service that will assess your needs and circumstances to pair you up with the lifetime mortgage expert who’s best place to help you. This will be somebody we’ve handpicked and vetted personally, so we can vouch for their track record.

Call 0808 189 2301 or make an enquiry here and we’ll set up a free, no-obligation chat between you and your ideal lifetime mortgage advisor today.

FAQs

Is it possible to ever owe more than my property is worth with a lifetime mortgage?

Negative equity is an obvious concern for many who are considering a lifetime mortgage. It stands to reason that if you live long enough the accrued income could roll up beyond the market value of your property.

It’s vital that the lender you choose is a fully fledged member of the Equity Release Council, which means they must adhere to a strict code of conduct designed to protect the interests of consumers at all times. Within this code of conduct is an agreement that the lifetime mortgages they provide have a ‘no negative equity guarantee’ included.

This means that you, or your beneficiaries, will never have to pay back any more than the value of your property.

What are the costs involved with a lifetime mortgage?

The costs and fees associated with a lifetime mortgage will obviously vary from lender to lender. Typically, these fees could amount to between £1,500 – £3,000 and would include:

  • Legal fees
  • Valuation fees
  • Buildings insurance
  • Arrangement fees
  • Advice / broker fees
  • Completion fees

Will my poor credit record impact upon my chances of getting a lifetime mortgage?

A poor credit record would normally have an impact on an application for a traditional mortgage. However, with a lifetime mortgage it really shouldn’t have any real affect as there is no requirement for regular repayments and your house is used as security.

An applicant is still required to declare this information and it may, potentially, impact the interest rate offered by a lender who may request that any outstanding debts are cleared before approval for a lifetime mortgage is granted.

Can I move house with a lifetime mortgage?

Yes you can. Another advantage of choosing a lender who is a member of the Equity Release Council is that all equity release loans must be portable.

However, any property purchased must be deemed suitable security for the lifetime mortgage and a sellable asset by the lender

Will a lifetime mortgage lump sum affect any means-tested benefits?

Yes, possibly, as you will be increasing the amount you hold as cash within your bank account. It is important you consider how your benefits could be affected before proceeding with a lifetime mortgage application.

Would a retirement interest only (RIO) mortgage be a better alternative than a lifetime mortgage?

This really depends upon your own personal circumstances. A retirement interest only (RIO) mortgage is quite similar to a traditional interest only mortgage but with no definite end date. As with a lifetime mortgage a RIO mortgage is redeemed when you die, go into long-term care or sell your property.

The key difference between a RIO mortgage and a lifetime mortgage is the requirement for regular interest payments; therefore, you would need to pass a lender’s affordability assessment. If you have a regular stable income in retirement such as a pension then this may be a consideration.

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About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!

Read more about Pete

Pete Mugleston

Mortgage Advisor, MD

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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