Lifetime Mortgages Explained

Many people reach retirement, work hard to pay off their mortgage, and suddenly find a much-reduced income but a large amount of wealth tied up in their homes. It can feel frustrating to not be able to afford things like home improvements, care costs, or holidays, especially when you feel so much of your money is out of reach.

If this sounds familiar, you might want to release some of that equity via a lifetime mortgage.

In this guide, we’ll look at how they work, the lenders that offer them, and how much you could borrow. This is our main guide. For all our content on this topic, which may include an article about your specific circumstances, visit our dedicated lifetime mortgages page.

What is a lifetime mortgage, and how does it work?

A lifetime mortgage is a form of equity release, a loan secured against the value of the home you own and live in. Equity is released to you as a cash lump sum or as a drawdown facility, and you don’t have to pay the loan back until you die or go into long-term care.

Depending on your lifetime mortgage type, you may not even have to make regular repayments. Instead, when the loan becomes repayable, the house is sold, and the debt is repaid in full using the proceeds, with anything left to your beneficiaries. If they prefer and have the cash, your beneficiaries can pay off the mortgage without selling the property and keep the house.

Most lifetime mortgages offer a no-negative-equity guarantee, so the debt can never exceed the property’s value, thus protecting your beneficiaries from having to pay an additional amount to settle the mortgage. You may even be able to ring-fence some of the equity to ensure there is something to inherit, sometimes called an inheritance guarantee or inheritance protection.

Suppose cash flow for medical expenses, home improvements, or other family expenses is an issue, but you have wealth tied up in your home. In that case, a lifetime mortgage can be a way to access this and enjoy retirement without downsizing.

Lending criteria

Although the details can vary between lenders, there are a few key criteria you’ll need to meet to be eligible for a lifetime mortgage:

Personal circumstances like your credit history are less relevant to a typical mortgage, as lenders aren’t taking the same risk. The property is there, ready to be sold when the loan becomes repayable.

Types of Lifetime Mortgage

There are several different ways to take your mortgage and repay it: interest-only, drawdown, flexible, enhanced, and protected.

Regarding how you take the cash, you can take it all as one lump sum at the start of the loan or take it more flexibly, perhaps a larger sum initially, but then with the option to take further amounts later. This is sometimes called a flexible lifetime mortgage or an income drawdown mortgage.

The benefits of taking your money over time like this are that you can budget more effectively, only taking it when you need it. It’s also cheaper, as you only start paying interest on each payment as you release it.

The other choice you’ll need to make is how you pay it back. The traditional option is the interest roll-up model. With this type of lifetime mortgage, you don’t make regular repayments; the interest you’re charged rolls up monthly and is added to the total debt. When you die or go into long-term care, the original loan and all the accrued interest are due.

If you want to reduce the amount due, you can make regular payments towards some or all of the interest. One of the main drawbacks of a lifetime mortgage is how easily an initially small debt can grow as interest builds up over time, so managing some of the interest payments as you go can help to counteract that. This option may not be affordable for everyone and will likely require some affordability checks from lenders.

Enhanced

Enhanced lifetime mortgages allow qualifying borrowers to benefit from a lower interest rate or higher loan-to-value (LTV), depending on the lender. This means you could raise more capital than with a standard deal.

They are based on the assumption that the lender will get their capital back quicker if you have specific health or lifestyle conditions that affect your life expectancy. There will be more certainty over the property’s future value, so they’ll be willing to offer you a higher amount or more favourable terms in the interim.

Enhancing the amount you can borrow, though, can sometimes result in higher interest rates, leading to higher overall costs.

Typical medical conditions that could enhance your lifetime mortgage are:

• Hypertension (high blood pressure)
• Diabetes
• Heart attack
• Stroke
• Cancer
• Multiple sclerosis
• Parkinson’s disease
• Dementia
• Kidney failure
• Liver disease
• Motor neuron disease
• HIV

However, these will depend on the lender, so it is especially important to seek advice from an experienced broker.

How to get a lifetime mortgage

If you’re considering a lifetime mortgage, there are a few initial steps you can take to help the process go smoothly and ensure you get the best deal.

How much you could borrow

You’ll be able to borrow a percentage of the value of your home, generally between 20% and 60%, depending primarily on your age. Younger borrowers can borrow less, as there is more time for interest to accumulate and grow the debt. Older borrowers can usually access larger amounts.

To see how this could work for yourself, take a look at our calculator here:

The amount that you can borrow on a lifetime mortgage isn’t linked to income and affordability in the same way that a traditional mortgage is. Your lender doesn’t need to worry about whether or not you can afford to make your monthly repayments. They need to know that they’ll get their money back once the property is sold. The determining factors, therefore, will be the value of your home and how long a lender thinks you’re likely to live.

If you have certain life-limiting medical conditions, you may be able to borrow more even if you’re still young; this is called an enhanced lifetime mortgage. Other lenders may take into account lifestyle factors such as smoking. Talk to your broker if you think these could apply to you.

Other factors may also impact how much you can borrow with a lifetime mortgage, such as the type of property you own, whether you want an inheritance guarantee, and how you plan to take the money.

Which lenders offer them?

Whereas you might go to a regular high street bank or building society for a standard residential mortgage, lifetime mortgages are normally offered by equity release specialists. This is one reason a broker is so important: they’ll already have relationships with these lenders.

You can see below some examples of what lifetime mortgage providers can offer:

Typical rates

The table below provides an illustration of the rates and terms currently available:

Please note that the above rates were accurate at the time of writing but are subject to change at the lender’s discretion. The best way to find the most up-to-date deals is to speak to a mortgage broker.

Are lifetime mortgages a good idea?

Yes, they can be if the circumstances are right for you and your situation. But, a lifetime mortgage might not be the right option for everyone. There are plenty of pros and cons to consider before you decide. 

Benefits of a lifetime mortgage

The main advantage of a lifetime mortgage is that you get to release equity without having to move house, a huge benefit if you’ve spent your working life paying off the mortgage on a beloved family home.

Other advantages include:

• Flexibility. Remaining in your home is obviously a big benefit. However, if you decide to downsize at a later date, you’ll still be able to do that with your lender’s approval.
• Access to cash when required. You can take your money as a one-off lump sum or in smaller amounts throughout your retirement. You will only start paying interest on cash once you take it, so if you know you want to spread it over time, then it’s cheaper only to take it as and when you need it.
• Funding your retirement goals. Once you’ve got your cash, you can spend it how you like. You’re not required to use it for your home – you can go on holiday, fund a motorhome dream, or whatever you choose.
• Peace of mind. No repayments are required during your lifetime. The most common type of lifetime mortgage lets interest roll up over time, so it’s only when you either die or move into long-term care that the original loan plus interest is due for repayment.

Potential drawbacks to consider

The key drawback of a lifetime mortgage is that interest accumulates quickly. Think about how people always say to start paying into your pension when you’re young, as compound interest can make early contributions worth a lot. It’s like that, only you owe the interest rather than benefiting from it.

The issue is exacerbated by interest rates on a lifetime mortgage, which are normally higher than on a standard mortgage.

Interest accumulation

Let’s take a look at an example. Say you decide to release £50,000 of equity from a house valued at, say, £250,000, with an interest rate of 6%. The following table shows what the loan balance will look like as the interest rolls up.

As you can see, this quickly eats into the equity in your home and even with the negative equity guarantee and inheritance protection, your loved ones could end up feeling like they’ve lost out. Using this example, a house completely free of debt would, in 20 years, have less than £90,000 equity remaining.

Other possible drawbacks could be: 

• Potential inheritance tax liability: If you decide to release equity and pass this on to your family (other than a spouse), remember that this would be classed as a gift for inheritance tax purposes. 
• Impact on benefits: If you’re in receipt of any means-tested benefits, it’s prudent to look into how releasing equity might impact your entitlement. You may find that having a large cash lump sum means you no longer qualify for certain benefits. 
• Charges and fees: If you decide at any point to repay your lifetime mortgage early, most typically by downsizing, this will incur early repayment charges that can be quite penal. It isn’t a product that is set up for such a scenario. 

There’s certainly a lot to consider with this type of finance, both pros and cons. This is why it’s always recommended to speak with a lifetime mortgage specialist before making any final decisions.  

Alternatives to lifetime mortgages

If you’re not sure a lifetime mortgage is the right way forward for you, there are a number of alternative options you can consider, such as: 

Move to a smaller home

Downsizing is the obvious solution if you want to release some of the wealth tied up in your home. It’s a very simple way to give yourself some extra cash without taking on any kind of debt. Of course, that doesn’t mean it’s easy—moving house can be very stressful, and there will be all of the extra costs of buying and selling to factor in, too.

Borrowing from friends and family

Borrowing money from people you know and love can be awkward and potentially lead to conflict, but it doesn’t need to be like this if you can take a business-like approach. 

If you have children with high incomes or savings, explain the situation to them. Show them how a lifetime mortgage works, and they may decide they would rather lend you some cash themselves and take it back when your home is eventually sold. If you only want a small amount, you could agree to a regular monthly repayment.

Remortgage or take a bank loan

Depending on how much you need and your eligibility, there may be other ways to borrow money, such as a bank loan or remortgage. Compared to a lifetime mortgage, the downside of this is that you have to pay it back monthly. Still, if you need the money for something specific, like home improvements and can make regular repayments, that could be an option.

Boost your income

If you want a lifetime mortgage simply to boost your cash flow, there could be other ways. Could you take a part-time job, for instance, or perhaps take advantage of the space in your family home to take a lodger or rent rooms through Airbnb? It’s also sensible to check your benefit status to ensure you’re claiming everything you’re entitled to.

Retirement interest-only mortgage

Sometimes called an RIO mortgage, this can be considered a cross between a lifetime mortgage—in that you only pay off the capital when you die or go into care—and a standard interest-only mortgage. You’ll need to make monthly interest payments, but keep the original loan amount fixed, meaning there is no threat of interest accumulation.

Get matched with a lifetime mortgage specialist.

If a lifetime mortgage is an equity release option that could work for you and your family, the next step is to find a broker specialising in this type of mortgage product. Their expert knowledge and experience can help you understand the full implications of a lifetime mortgage and research which products would be best for your specific circumstances.

Call us now on 0330 818 7026 or make an online enquiry, and we’ll ask for a few quick details to help us match you with an advisor. We’ll then arrange a free, no-obligation chat so you can find out more about how they could help you.