How Does a Lifetime Mortgage Work?
There are two main ways you can raise funds through a lifetime mortgage, with the money borrowed against your equity:
- Receiving one cash lump-sum transfer.
- Drawing down payments as and when you need them.
The latter tends to work well if you want to use a lifetime mortgage to supplement your pension. You can make withdrawals periodically rather than all at once.
Conventional mortgages have a fixed term, but a lifetime mortgage only becomes repayable when you pass away or enter care - the property is sold. The proceeds are used to pay back the debt, with the balance due to the borrower.
If the original applicant has passed away, the equity remaining goes to the deceased's estate and is shared between beneficiaries per their will.
Trustees can also opt to pay the debt back without selling the property where there are sufficient funds.
Lifetime Mortgage Rates and Repayments
Unlike a normal mortgage, a lifetime mortgage doesn't require monthly repayment or regular interest charges.
You might be able to make voluntary payments, but otherwise, the interest is added to the balance and recouped on the sale of the property.
That does mean that the debt will increase over time, although if you use a drawdown product, you only owe interest on the cash used rather than the whole facility available.
Some lifetime mortgage lenders will offer the choice to pay the interest, mitigating the balance owing over the total mortgage lifetime.
Rates can be fixed or capped, a common feature of lenders participating in the Equity Release Council.
How to Get a Lifetime Mortgage
There are several eligibility criteria to be aware of - primarily that you need to be 55 or above and own a property in the UK.
You can apply if you have a holiday home or spend time abroad but must be a UK resident and live here for at least half of the year; lenders can't take security for a lifetime mortgage against a secondary home.
Other requirements include:
- Maximum ages: depending on the lender, you might find no upper age limit at all. Others will lend up to age 80 or 85 at the start of the loan.
- Proof of income and pension: lenders need to see paperwork showing your pension status, any other debts, council tax liabilities and insurance documents for the property.
We'd always recommend seeking professional advice to make sure you understand all the pros and cons and apply only to the most suitable lenders.
What is a Lifetime Mortgage UK - and What Are the Different Mortgage Products?
Lifetime mortgages come in various forms and structures, and there isn't just one universal option.
Some of the most common lifetime mortgages include:
- Income drawdown loans - this is where you can take a small payment, to begin with, and then further drawdowns as you need them, with an upper cap on the amount available.
- Interest repayment loans - rather than accruing interest, you can opt to pay the interest on the loan as you go to ensure the total debt remains the same.
- Enhanced lifetime mortgages - some lenders offer more advantageous terms, provided the applicant is in poor health and needs immediate financing. The process works like an enhanced annuity, assessing life expectancy and usually facilitating a higher LTV than offered otherwise.
- Lump-sum lifetime mortgages - the basic product is where the applicant receives a tax-free lump sum, doesn't make any repayments, and the interest is added to the balance.
Borrowing Maximums on a Lifetime Mortgage Equity Release Product
Affordability metrics don't come into play for lifetime mortgages because you're unlikely to be asked to make repayments towards the debt.
The more important elements are the value of your property, your age and your health.
Applicants of more advanced age or those with existing health conditions may be able to borrow more - the reality is that the lender knows you're likely to pass away sooner than a 55-year-old in robust health. They'll therefore recoup their lending, plus interest, much faster.
Some lifetime mortgage lenders will request a medical assessment and/or a doctor's report, although that's usually only mandatory for enhanced plans.
It's also necessary to conduct a property valuation, and the property needs to be sellable and worth enough to secure the amount you'd like to borrow.
How Does a Lifetime Mortgage Work With Loan to Value Ratios?
Loan to Value ratios (LTV) indicate the amount you can borrow as a percentage of the value of your home - for example, if you own a property worth £500,000 and borrow £250,000, the LTV is 50%.
Most lenders set the cap at about 50% or 55%, and some (although not many) will lend as much as 60%.
Professional Lifetime Mortgage Advice
We'd recommend you speak to an independent mortgage broker before you apply since equity release is a great opportunity to raise substantial sums to finance a comfortable retirement - but it has repercussions too.
The main downside is that your home will probably be sold when you pass away or move into care, so you must weigh up the options and perhaps consider other borrowing opportunities.
Mortgage Brokers is always available to help - please visit our Contact page for the easiest ways to get in touch.
