If you’re a homeowner in later life, the idea of releasing some of the equity in your property can be tempting. Whether you’re looking to supplement your retirement income, pay off debts, or make home improvements, a lifetime mortgage might be the solution. But what exactly is a lifetime mortgage, and how does it work?
In this guide, we’ll explain about lifetime mortgages, including the different types, how they work, and the key differences from equity release.
What is a lifetime mortgage?
A lifetime mortgage is a type of loan that allows homeowners aged 55 or older to release money from their property without the need to sell it. It’s one of the most popular forms of equity release and can be a great way for older homeowners to unlock some of the value tied up in their home.
Unlike traditional mortgages, with a lifetime mortgage, you don’t need to make monthly repayments. Instead, the loan, along with any interest, is repaid when the homeowner passes away or moves into long-term care.
Related: What is a shared equity mortgage release? Is that right for you?
How does a lifetime mortgage work?
With a lifetime mortgage, the amount you can borrow depends on a variety of factors, including your age, the value of your home, and the lender’s criteria. The loan is secured against your property, meaning that the amount you borrow will be repaid from the sale of the home when the time comes.
The key feature of a lifetime mortgage is that you don’t have to make regular payments. Instead, the interest compounds over time, and the loan is paid off when the house is sold, either after your death or if you need to move into care. However, many lifetime mortgage providers offer plans where you can choose to make voluntary repayments if you prefer. This can help reduce the loan balance over time.
Related: Understanding the different types of mortgages
Types of lifetime mortgages
There are a few different types of lifetime mortgages, each offering different features to suit your needs:
Interest-only lifetime mortgages
This type allows you to pay off the interest on the loan, keeping the principal balance the same. This could be ideal if you want to manage the loan more actively and avoid the interest rolling up.
Roll-up lifetime mortgages
With a roll-up mortgage, no repayments are made throughout the life of the loan. Instead, the interest accumulates and is added to the loan balance. This type is ideal if you don’t want to make repayments but want to access the equity in your home.
Drawdown lifetime mortgages
This type lets you access a lump sum or drawdown funds as needed. The advantage of this option is that you only pay interest on the funds you withdraw, making it more flexible than a standard lump sum loan.
Enhanced lifetime mortgages
These are available for people with health conditions or lifestyle factors that could reduce life expectancy. Typically, these offer higher loan amounts based on the borrower’s situation.
Related: Your guide to selling with a mortgage
What’s the difference between a lifetime mortgage and equity release?
It’s easy to confuse lifetime mortgages with equity release, but they aren’t quite the same thing. In fact, a lifetime mortgage is a form of equity release, but equity release is a broader term that refers to several different types of financial products that let you access the money tied up in your home.
Equity release products include:
- Lifetime mortgages – The loan is secured on your property, and the interest is added to the loan balance.
- Home reversion plans – In this plan, you sell all or part of your home to a provider in exchange for a lump sum or regular payments, but you can continue living in the property for the rest of your life.
The main difference is that with a lifetime mortgage, you still own your home, and the loan is repaid when you die or move into care. With a home reversion plan, you no longer own your home, as you’ve sold part or all of it.
Can you pay off a lifetime mortgage?
While lifetime mortgages are typically repaid when the homeowner passes away or moves into care, it is possible to pay off a lifetime mortgage early. However, it’s important to note that some plans may come with an early repayment charge. This means there could be a penalty if you decide to settle the loan before the usual time. On the bright side, some providers offer flexible options, allowing for partial repayments without penalties, so it’s always a good idea to check with your lender for the specifics.
Before making any decisions, take the time to weigh the costs and benefits. Speaking with a financial adviser or your lender can help you explore the best options for your situation.
Lifetime mortgage providers
There are a variety of lifetime mortgage providers in the market, including some of the UK’s leading banks and building societies. It’s important to shop around and compare interest rates, terms, and flexibility before committing to a provider. You should also look for a provider who offers a “no negative equity guarantee.” This means that even if your home sells for less than the value of the loan, you won’t owe more than the sale price.
A solution for later life
A lifetime mortgage can be an excellent way to release some of the equity tied up in your home without having to move or sell. With different types of lifetime mortgages
