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Lifetime Mortgages Explained
Lifetime mortgages are a way to borrow against the equity you've built up in your property, using that ownership as security against the debt.
Most products don't require any repayment and fall due when the owner either passes away or moves into permanent care - in which case the property is usually sold, and the balance of the profits paid over.
It's essential to carefully research this kind of equity release product and understand what it means for your home and your ability to pass it on to future heirs.
This page runs through the basics of lifetime mortgages, compiled by the mortgage experts at Revolution Finance Brokers.
What is a Lifetime Mortgage?
In essence, a lifetime mortgage means that the lender looks at your equity - so if you own your home mortgage-free, your equity is the same as the property value.
If you've got an existing mortgage, the amount you can borrow will be slightly lower, but you may be able to repay the current debt and take the rest of the loan to use in retirement.
There are few limitations on what you can do with the capital raised, but that might include:
- Financing home improvements.
- Giving cash gifts to family members.
- Covering the costs of medical care.
- Paying for a holiday.
Most lenders consider applicants from age 55, and although the loan is secured against the property, you still own it in full.
That's a little different from home reversion plans, where the lender buys a chunk of your home, paying you a tax-free amount and the right to remain, without rent, until you die or transition into care.
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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.
Negative equity is never a good position to be in - it means you owe more than your property is worth.
There is the potential to find yourself in this scenario if you borrowed the highest possible LTV, lived for many years, and accrued substantial interest that exceeded the property valuation.
Approved lenders should be Equity Release Council members, so they'll comply with codes of conduct to ensure your interests are protected and guarantee that you will not fall into negative equity.
That assurance means that you, or your heirs, won't ever need to repay more than the property is valued at.
Lifetime mortgage rates vary considerably, depending on the risk factors, your age, how much you'd like to borrow, and your health.
Other costs are typically £1,500 to £3,000, covering legal and valuation expenses, insurance, completion charges, brokerage fees and arrangement costs.
Adverse credit isn't a big issue with a lifetime mortgage because the lender doesn’t need to verify that you can afford to make regular repayments. However, they might need to review other debts secured against the home.
The application process includes an information declaration, so you might find that your interest charges are higher or you need to pay back other outstanding debts before they can approve your lifetime mortgage.
Yes, provided you use a lender affiliated with the Equity Release Council, your lifetime mortgage product must be portable. You can switch it over to a new property if you decide to move.
Your lender would need to check that the new home is still suitable as security against the mortgage borrowing in question.
You must speak with an independent broker before applying, particularly if you rely on means-tested benefits.
Because you'd be increasing your cash assets (potentially by a lot), you might see an impact on your benefit income.
Interest-only retirement mortgages work like any other interest-only loan, but they don't have any predetermined term end date.
The mortgage works in the same way, so it is redeemable upon your death, sale of the property, or transition into long-term care.
Retirement interest-only mortgages are different from lifetime mortgages because you need to make regular interest payments, so affordability assessments are a factor.
If you're unsure which is the better option, please get in touch, and we'll review your circumstances and requirements to make a recommendation.
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The content included in our articles, blogs, web pages and news publications is based on information accurate at the time of writing. Note that policies and criteria can change regularly throughout the UK mortgage lending market, and it remains essential to contact the consultation team to receive up to date guidance. The information included on the Revolution Brokers site is not bespoke to any circumstances or individual application scenarios and therefore is not intended to be used as financial advice. The content we share is designed to be informative and helpful but cannot be relied upon to provide individual advice relevant to your mortgage requirements. All Revolution team members are fully qualified, trained and experienced to provide mortgage advice of an independent nature.
We collaborate with lenders and providers who are regulated, authorised and registered with the Financial Conduct Authority (FCA). Should you require specific mortgage borrowing types, some products such as buy to let mortgages may not be FCA regulated. The Revolution team can provide further information about regulated and unregulated lending as required. Please remember that a mortgage is a debt which is secured against your home or property. Your home can be at risk of repossession if you do not keep up with the repayments or encounter any other difficulties in managing your mortgage borrowing responsibly. This also applies to any remortgage or home loan secured against your property, including equity release products.