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A Detailed Guide to Equity Release Lifetime Mortgages

Money Savings Advice Equity Release Lifetime mortgages

A house is the biggest purchase most of us will make in our lifetime. This means there’s a lot of money tied up in our homes – tens or even hundreds of thousands of pounds.

What Is an Equity Release Lifetime Mortgage?

A lifetime mortgage is a form of equity release where you release equity from your home. The debt becomes repayable when you die or move into full-time care, usually from the sale of your home.

If you want to free up some of that cash without having to move, you could consider equity release. The most common type of equity release is what’s called a lifetime mortgage.

But is equity release through a lifetime mortgage something you should consider? What even is a lifetime mortgage?

Let’s dive into the nitty-gritty details.

Looking for other information on Equity Release? This guide has info on ‘Life time mortgages’ We have also writen extensively about:

We update all our guides regularly. If you are researching Equity Release and we haven’t got an exact guide that helps you, keep coming back as we update daily.

What Is a Lifetime Mortgage?

A lifetime mortgage is essentially a loan that’s secured against your home. It lets you unlock some of the value of the property as tax-free cash, ready to spend on anything you like.

A lifetime mortgage is designed to run for the rest of your life. Unlike with other loans, you don’t actually have to make any monthly repayments unless you choose to. Instead, the loan is paid off in full when you die or move into long-term care. The money to do this comes from the sale of the house, with any left over going to beneficiaries named in your will.

According to the Equity Release Council 37,000+ people used Equity Release schemes in 2018, releasing over £3.06bn from their properties.

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How Does Equity Release With a Lifetime Mortgage Work?

The amount of money you can release depends on a few factors, including how old you are, how much your home is worth and whether or not you want to make repayments. You can usually release between £10,000 and £100,000 in the form of a loan.

How these loan repayments work is that interest builds up over time. This interest is charged on the amount you’ve borrowed, then it’s up to you whether you pay off some or all of this interest as you go or have it added to the total loan amount due after you pass away.

Is There a Minimum Property Value for a Lifetime Mortgage?

In order to make a lifetime mortgage worthwhile for you, and the lifetime mortgage company, your property would have to be worth a minimum of £70,000 (although this can vary from company to company).

As a consequence, it is very important to get your home valued if you are considering a lifetime mortgage. This will save any wasted time further down the line if the lifetime mortgage company was to reject your application due to the value of your property.

Types of Lifetime Mortgages

There are different lifetime mortgage plans to meet different needs. You can choose to release the cash all in one lump sum, take smaller amounts at regular intervals or a bit of both.

The two main lifetime mortgages you’ll have to choose from are:

●     Interest roll-up mortgage. Whether you choose a lump sum payment or smaller regular payments, the interest is added onto whatever you borrow. You don’t have to pay it off as you go as all debts are paid when your house is sold after your death.

●     Interest-paying mortgage. You pay off any (or all) interest owed in monthly or ad-hoc payments. This stops interest from ‘rolling up’ and can help you keep your repayment figure stable – this makes things like working out inheritance easier.

Equity release of any kind, lifetime mortgage or otherwise, comes with its own pros and cons. While a good option for some, it completely depends on your personal circumstances.

Average House Price for Equity Release Plan Customers

This statistic illustrates the average house price for equity release plan customers in the United Kingdom (UK) from the second half of 2015 to the second half of 2019, by type of lifetime mortgage. Equity release plans are designed to allow homeowners to access some of the value of their property without the need to sell their house and move out. A lump sum equity release plan facilities a one-off payment, whilst a drawdown equity release plan enables a homeowner to receive an initial advance, alongside an agreed amount cash facility that can be used when required. It can be seen that the average house price for both lump sum and drawdown customers increased steadily during this period, reaching over 315 thousand British pounds in lump sum plans, and 358 thousand British pounds in the drawdown plans, as of the second half of 2019.

Who Can Apply for a Lifetime Mortgage?

There are eligibility criteria for lifetime mortgages. While these can differ slightly between lifetime mortgage providers, you can generally expect the following:

  • You have to meet a minimum age – usually 55 or 60, depending on the provider
  • Your home has to be worth a certain value – usually at least £70,000 – £100,000
  • The property has to be your main residence
  • The property has to be under standard ownership, not shared

Even if you are eligible for a lifetime mortgage, take time to carefully weigh up your options.

Is a Lifetime Mortgage Right for You?

There’s a whole host of reasons why a lifetime mortgage might work for you – you want to free up some cash to help your family get on the property ladder or contribute to a wedding, pay for care, or even just treat yourself in your retirement. And you can do all of this while still owning and living in your own home, or even moving home if you so choose.

However, there are some disadvantages of lifetime mortgages and equity release, in general, to weigh up too. As well as the positives, remember that:

Debts quickly build up. Lifetime mortgages typically have very high-interest rates. Even if the interest rate is fixed, the amount you owe could very quickly build up and drain all remaining value from your home. When the property is sold, all the money will be used to pay off the loan, and nothing will be passed onto your beneficiaries.

Debts can be passed on. If your lifetime mortgage doesn’t have a ‘no negative equity guarantee’ then you could end up owing more than the value of your home. 

This debt would be passed onto your beneficiaries instead of any inheritance. Always insist on a lifetime mortgage having this guarantee to prevent this from happening.

Equity release affects benefits. Be aware that releasing equity from your home could come at the cost of any means-tested benefits you claim. If you release equity it could mean you are no longer eligible for pension credit or council tax benefit.

The pros and cons have to be carefully weighed while you’re doing your retirement planning. Remember, it’s not just about you. Your decision could affect the rest of your family too.

Are Lifetime Mortgages Safe?

Historically there have been concerns with regards to lifetime mortgages, but since the Financial Conduct Authority (FCA) took control of regulating the sector, we have seen some significant changes.

All advisers have to be qualified, experienced and employers have an obligation to maintain ongoing training. As a consequence of the FCA now being involved in the lifetime mortgages industry, there is a much clearer path towards compensation if you have been a victim of rogue advice or mis-sold a product.

Could My Lifetime Mortgage Fall Into Negative Equity?

There are numerous reasons why the bar is set relatively low with regards to a lifetime mortgage loan to value figures. One of those reasons is that many people choose the rolled-up interest option; therefore, there needs to be a significant buffer between the initial loan, interest and the value of the property.

The other reason is that regulations protect homeowners from falling into negative equity with their lifetime mortgage. As a consequence, if in theory, your property was to fall into negative equity, then it would be the lifetime mortgage company who would foot the bill.

Change in the Volume of Applicants for Lifetime Mortgage

This statistic presents the change in the volume of applicants for lifetime mortgage, the leading product of the equity release market in the United Kingdom (UK) from 2012 to 2016. Equity release is a way of financing loans, which provides the owner of a house or other type of property with funds based on the value of their real estate, while allowing for continued use of said property. Lifetime mortgage is one of the products offered within equity release schemes. It denotes a loan secured on the property, which is sold after the borrower moves out or dies; meaning after the use of the property is discontinued by the borrower. The funds obtained in the sale help to pay the compounded interest, which has been added to the capital throughout the term of the loan. As of 2016, the volume of applicants for the lifetime mortgage product grew by 22 percent, in comparison to the previous year.

Do I Need to Undertake a Mortgage Affordability Test?

The mortgage affordability test is there to run the rule over those making monthly repayments. Those who choose a lifetime mortgage with rolled-up interest, paid off at the end of the term, don’t make any monthly payments so, therefore, there is no need for a mortgage affordability test.

This is one of the main reasons why home reversion schemes and lifetime mortgage schemes are so popular amongst those aged over 50.

Do I Qualify for a Traditional Remortgage if Aged Over 50?

If you have sufficient income to pass the mortgage affordability test, then there is no reason why you would not be able to obtain a traditional remortgage deal (subject to age). The problem for many people is the fact that in their later years, although we are all working longer, they will see a reduction in their regular income.

As a consequence, many people will find it difficult to pass the mortgage affordability test as they approach part-time or retirement from work.

What Are the Options if I Am Locked Into High Mortgage Interest Rates?

In theory, if you are locked into relatively high mortgage interest rates and you have seen a reduction in your income, you would struggle to pass the traditional mortgage affordability test.

Thankfully, the authorities do have scope to offer remortgages on reduced interest rates for those “locked” into high rate mortgages. If this is something you are struggling with, a lifetime mortgage may be an option although you may also be able to switch your high rate finance into a more competitive mortgage.

Money Savings Advice Tip

If you are considering Equity Release to help with retirement planning, paying off some debt or helping your family out financial, our advice is to speak to an expert who can provide a whole of market quote enabling you to decide which equity release scheme works best for you.

Alternatives to Equity Release Through a Lifetime Mortgage

Equity Release: Home reversion

There are two different ways to release equity from your home – a lifetime mortgage or a home reversion. They both involve getting cash out of your home, but one main difference is that with home reversions, you sell a share of your house in return for the money. You still get to live in your home, but you become a co-owner – it’s no longer just in your name.

Releasing Cash Through Other Means

Equity release is not the only way to top up your retirement pot in later life. Some other options you could consider include:

  • Taking out a regular loan that isn’t secured against your home
  • Using money from savings or investments as your spending money
  • Downsizing into a smaller, cheaper home and living off the money saved in the move

Before you make any big decisions about your later life funds, it may be worth speaking to an independent financial advisor who can help you weigh up all of your options.

Quick Equity Release FAQs

Home reversion plans are, in essence, a means of selling a share in your property to an investor, in exchange for payment. There are no repayments, with the investor receiving their share of proceeds when the property is eventually sold.

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The Equity Release Council is the industry body which represents equity release providers, qualified financial advisers, solicitors and intermediaries. Equity release is a growing sector, especially for older homeowners who may have limited access to finance.

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You need to be at least 55 years old to apply for equity release in the UK. If you are planning to make a joint application, this applies to both of you.

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Equity release drawdown works by giving you the value of your loan as a pot that you can make withdrawals from. You’ll only pay interest on the money you decide to withdraw.

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Equity Release enables you to release cash from your property. There are two option, a drawdown lifetime mortgage is allowing you to release the money monthly or a Lifetime mortgage Lump Sum which pays the released cash in one payment to your account.

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How Can Money Savings Advice Help You With Releasing Equity?

Here at Money Savings Advice, we have partnered with some of the UK’s leading Equity Release brokers. They have already helped thousands of people get the best Equity Release deal and they can do the same for you.

Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.

If you would like to speak to one of these brokers who can provide you with a ‘whole market quote’ then click on the below and answer the very simple questions.

Laura is a professional content writer and learning designer, passionate about empowering people through straightforward, jargon-free content. When she's not reading or writing about all things personal finance, you can find her in the gym, barbell in hand.

Laura is a professional content writer and learning designer, passionate about empowering people through straightforward, jargon-free content. When she's not reading or writing about all things personal finance, you can find her in the gym, barbell in hand.

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