Lifetime Mortgage

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Lifetime Mortgage

Mark Thompson explains lifetime mortgages and how they can be a helpful option in releasing the equity in your home.

What is a lifetime mortgage and what are the different types of lifetime mortgage?

A lifetime mortgage is a mortgage that’s taken out for life. It’s available to people over 55 – they take out a mortgage which is not repayable until they either die or go into long-term care.

A lifetime mortgage is deemed to be an equity release mortgage, as is a ‘home reversion plan.’ With a home reversion plan, somebody sells their interest in a property to a financial provider. In return, they’re allowed to stay in the house for as long as they live or until they go into long-term care.

The two are quite similar, although with a lifetime mortgage you’re just borrowing against the property – you always own it. With the home reversion plan, you’re actually selling it and are given the right to stay there.

Home reversion plans where you sell a share of the property are virtually unheard of now. They used to be a lot more popular in the earlier days of equity release. They are a tiny percentage of the market and I don’t advise on them.

Someone might take a home reversion plan because they can get slightly more money out of their property, but generally people prefer not to sell their home. They’d rather retain the ownership of the property and just have it mortgaged for life.

How does a lifetime mortgage work? Who is eligible for a lifetime mortgage?

It’s a mortgage that’s fixed for life. If it’s for a couple, it only becomes repayable when the last one of them dies or goes into long-term care. If one person passes away, the other party can stay in their home.

After they pass away or move into long term care, the property generally has to be sold, unless the beneficiaries want to buy it. No mortgage payments have to be made until the property becomes vacant.

In terms of who’s eligible, it’s generally homeowners over the age of 55. There’s also property eligibility. The property must be the primary residence and meet the lender’s criteria. There is often a minimum property value of £70,000, although this varies.

What should I consider before taking out a lifetime mortgage?

There’s a lot to consider. The basic thing is to make sure it’s right and relevant for you. There may be other options to look at.

An important factor with a lifetime mortgage is the interest. You don’t have to pay interest on the loan, but the amount you owe will build up and compound – you pay interest on the Interest. So a big consideration is how that will impact your estate and beneficiaries.

There could be other standard mortgages that might work for you. There are many issues to look at before we dive in. Sometimes people worry that when they speak to an advisor they might start to feel under pressure. But, in fact, it’s the other way around.

We will spend a lot of time deciding whether or not it’s the right thing for you in the first place. We advise you on whether to look at alternatives. It takes time to establish exactly what is right for you.

Another thing with a lifetime mortgage is that it’s not just about tomorrow. It’s looking at next week, next month, next year and 10 years in the future. Clients are quite surprised when I start talking to them about future financial situations and ask a lot of probing questions. There’s a lot to consider with lifetime mortgages.

What are the criteria for a lifetime mortgage?

Generally the criteria with a lifetime mortgage are that you are over 55 and own a property valued at over £70,000. The property has to be of a certain type and build quality. The lender could be lending you money for twenty, thirty years, or longer.

They want to know that the property that they’re lending on is a good security, so there are a lot of criteria to do with that. If you’ve got a property that is generally saleable which has been constructed in an acceptable manner, you should be able to get a mortgage. There are various issues that might cause a problem for example, overhead power cables or spray foam in the loft.

Let’s see if the property qualifies for a lifetime mortgage and make sure it’s right for you. So quite a lot of the initial conversation with a client is to check you would fit the criteria.

Can you borrow more on a lifetime mortgage?

Generally speaking, you can’t. These providers are lending you money for life and you don’t have to make any payments. The interest will compound, so over the years, you will owe more money and the value of your estate would reduce. If they’ll lend you too much, after so many years you could owe more than the property is worth.

You might hear negative stories about people who took out equity release products in the old days at really high interest rates. We’re members of the equity release council and all the products we sell have a No Negative Equity guarantee – which means you can never owe more than the property is worth.

These providers are very careful about how much to lend you in the first place, because they could end with a negative equity scenario, which they have to fund. So they don’t want to lend too much. Property values might fall in the future, and some have dropped recently after financial issues in the last few months.

When the outlook for the property market was less favourable, equity release Loan to Values dropped because the lenders don’t want to be overexposed at the end of the mortgage term. [podcast recorded in December 2023]

How do you calculate a lifetime mortgage?

It’s not an easy one to answer because the amount you can borrow depends on your age.

If there are two applicants, it’s based on the age of the youngest. If the man is 75 and the woman is 55, they will do all their calculations based on the younger applicant. A 55 year old woman could live for another 45 years or more.

But an eighty year old person on your own won’t live as long, therefore they’ll lend you more. There’s less risk of ending up in a negative equity position.

What is the maximum loan to value on a lifetime mortgage?

Generally speaking the current maximum loan to value you would get is about 50%, and that would be for someone 75 years or over.

If they had a house at £200,000, the maximum they could take out would be £100,000. But the market changes and products are changing all the time. So we have to review everyone individually.

Is there an alternative to a lifetime mortgage?

Those are things that we should always consider before going into a lifetime mortgage. Is a standard mortgage more relevant, for example?

I had a gentleman recently, a retired doctor with a very good pension. He wanted to gift money to his son to help him buy a house. He’d been referred to me about a lifetime mortgage. He was unusual, because he had a lot of income from his pensions, so he could afford a standard mortgage and pay that back. He did that instead, and got a slightly cheaper rate.

Another obvious alternative to a lifetime mortgage is to look at other sources of money. It might be selling the house or renting out a room or part of the house. There are all sorts of alternatives we’d look at that aren’t mortgage related.

There are other types of mortgages for people in later life, such as the retirement interest only (RIO) mortgage. This isn’t an equity release mortgage, but It’s quite similar in that people stay in their home and it’s not repayable until you die or go into long-term care.

The difference is that you have to make payments. With a lifetime mortgage you don’t have repayments and your income is not relevant. But with a retirement only mortgage you have to be earning enough to cover monthly repayments.

Like a standard mortgage, if you don’t make payments you could end up being repossessed. There isn’t such a warning on a lifetime mortgage because the lender isn’t expecting you to pay it back.

I often have people come to me wanting a RIO, but when they understand lifetime mortgages, they choose these instead. I do hear about mortgage advisors who know nothing about lifetime mortgages setting up a RIO for clients without educating about lifetime mortgages.

For some people a RIO can be the right thing to do, but you should definitely compare it with a lifetime mortgage for your circumstances.

Can I get an interest only lifetime mortgage?

All lifetime mortgages are interest only and they’re fixed for life. If you borrow £100,000 on a normal mortgage, you pay the interest. But with a lifetime mortgage you don’t have to pay that interest. You can if you choose to. If you don’t, the interest will compound and increase the amount you have borrowed.

Can I use a lifetime mortgage to purchase a property?

Yes, you can. A lot of people don’t know this. The perception is that you just do it on the house you own. That’s correct, but equally, you can do it on a house you’re going to buy, as long as it’s going to be your main residence.

One thing I didn’t touch on earlier is that you can’t use a lifetime mortgage for business purposes. Back in the 1980s in particular, people were being persuaded to take money out of their houses and invest in dubious investments having been told that they could make lots of money rather than it being tied up in their property. Then all of a sudden their investments crashed and they were still left with mortgages on their houses and they hardly had any equity left, if at all. We cannot advise anybody to take money out for business/investment purposes.

Then all of a sudden the bottom dropped out of that market and they were left with mortgages worth more than their houses. We cannot advise anybody to take money out to invest in anything related to business.

But if you want to buy a house, that’s something I help with quite often. It can be a lifesaver in later life if you don’t have enough to buy a house in the area you want or need. With equity release you can live in a great property in a much better area. You could borrow 50% of the value, as long as it’s a qualifying property.

I also work with clients who have an interest only mortgage that’s coming to an end. They’ve had it for 20 years and never paid anything off. The mortgage lender then wants the full loan amount back.

If they have a £300,000 house and a £100,000 mortgage, they might decide to sell the house to repay the mortgage. But they then only have £200,000 to buy a home, which won’t be anything like the £300,000 house they left.

But with equity release they could borrow a certain percentage of a new property – they may be able to buy a £260,000 home – so that drop is not as painful. They can get a much better property than they thought.

I’ve got a couple at the moment who were being pressured by the bank to pay the mortgage. They sold their home and then used equity release to buy a new property near their children. It really got them out of jail – it can be fantastic in certain situations.

Can you pay a lifetime mortgage back early?

You can pay a lifetime mortgage back whenever you like – it’s a mortgage. But you will have to pay any outstanding interest and cost associated with that mortgage. There are early repayment charges, because this isn’t a short term thing. The lender is guaranteeing you a fixed rate for life.

The early repayment charge ensures the lender isn’t out of pocket if you then return the money to them. The shortest term on the market for early repayment charges is four years, but they can go up to 10 years. So if you pay the mortgage back, you may have to pay a certain penalty, which is usually a percentage of the original loan. That would decrease over the years.

What is the cost of a lifetime mortgage?

We always do an illustration for a client to show them exactly what’s included in the mortgage and what it will cost over a period of years. We don’t know how long the mortgage is going to last, so there would be examples of 15 years, 20 years or 25 years broken down year on year.

We show you what it’s going to cost if you don’t make any payments. If you do decide to make payments, you can keep the interest under control. You can choose to pay the interest on a regular basis. With some products, you can make ad hoc payments without any penalty.

What if I owe more than the value of my home?

We only advise on Equity Release Council endorsed products – so while you might owe more than your home is worth, you’ll never be asked to repay the shortfall except in extremely rare circumstances. That’s the No Negative Equity guarantee. Your estate would not have to make up the difference and you’re not leaving a debt.

Going back to retirement interest only mortgages, that’s another big difference. There’s no guarantee on those, so you could potentially owe more on a RIO than your home is worth. Your estate would have to repay any difference.

Can I still claim benefits with a lifetime mortgage?

It depends what those benefits are. We always ask people to assess that. I’m not a benefits adviser and as we know, they change a lot in life. So we make sure people investigate that to see if it will impact those or future benefits.

Do I have to take the full lifetime mortgage loan at once?

No. When people borrow lifetime mortgages it might be for a single reason or lots of reasons. They might allocate funds for various things.

Around 40% of people take equity release to make home improvements, but others want to go on more holidays, buy a new car or gift some money to the children to buy their first home.

Generally speaking, it wouldn’t be advisable to take all the money at once if you don’t need it. If you’re buying a new car you’d borrow money now, but if you want to spend £10,000 a year on holidays, you wouldn’t take it all now and put it in the bank. As soon as you take the money you’re paying interest on it.

Instead, you might take £20,000 to do some home improvements now and then allow £200,000 for holidays on a ‘drawdown’ basis. You can take that money as and when you need it. The beauty of that is you only paying interest on the money withdrawn.

We would always evaluate with people what money they need now and what money they will need in the future. We build a plan as to when they would take that money.

Do I still own my house with a lifetime mortgage?

Yes, you do, and that’s why people prefer a lifetime mortgage to a home reversion plan. It’s like a standard mortgage – you own the home and you just happen to have a loan on the property. It has to be paid off before anything can be done with the house in the future.

Imagine a couple who own a home and they’ve both lived in it for years. They’ve both now died. Their beneficiaries or estate would have a year to sell the home, if that was the plan to pay off the mortgage. Any residual value of the estate would then go to the beneficiaries.

But the property is always the owners’. It’s never owned by the bank.

Can I move home with a lifetime mortgage?

Yes, you can. Like most standard mortgages you can port the mortgage. If you’re moving home, you could sell and pay off the equity release mortgage, which is one option. You’ve got the right to do that.

Or you might not be downsizing much, and are just moving to be nearer family. You might not want to lose the borrowing facility and decide to take the mortgage with you. As long as the property meets the criteria of the lender, that’s fine.

It gets a bit more complicated if the value of the property affects the lending. Perhaps on the new property they would only normally lend £150,000, but your current loan is £200,000. You might have to pay £50,000 back.

So you can move with a lifetime mortgage, but we need to consider whether to keep that lifetime mortgage or take another one.

What are the advantages and disadvantages of a lifetime mortgage?

A lifetime mortgage gives you cash when you need it. You can release money from your home, tax free, to improve your lifestyle or top up your income in retirement. You can stay in your home. People used to worry about losing their home, but a lifetime mortgage helps you stay there.

Another benefit is that no payments are needed. You can make payments if you want to manage the interest and keep it lower for your beneficiaries. But you don’t have to. The No Negative Equity guarantee protects your estate and it may reduce your inheritance tax liability.

On the risk side, it could affect benefits and your tax situation. The total amount you owe increases if you don’t service the interest and that would have an impact on your estate. Also, if you don’t meet some of the terms and conditions, such as keeping the property in good repair, the lender may decide to do things on your behalf. That’s an obscure one, but it can happen.

Another downside is the upfront cost for the product – it’s not cheap in the initial stages. It’s not short term borrowing, either. It’s not necessarily the most cost effective thing to do, depending on the situation.

People sometimes look at equity release for paying off other debts, but there may be better options. We would always look at what those options were. You wouldn’t take equity release to pay off credit cards, for example. All that’s going to do is increase the amount that you owe over time.

If you decide to pay the mortgage off, there could be quite high costs. That’s also the case with a standard mortgage, but the charges can be more protracted in how long they last.

A lifetime mortgage will last as long as you and your partner do. The longer you live, the more you will owe. Your estate could be radically reduced if you haven’t made any payments, and that could impact the amount left to beneficiaries.

Views change over the years, however, and people are now more focused on their own situations. It’s not like it was 30 years where everyone wanted to leave money to the kids. We need to live our own lives. Perhaps your kids have more than you ever had. In a lot of cases that isn’t a risk or a problem for people.

I always work with the children and their parents to make sure everybody’s happy with what they’re doing and that it’s the right solution for their situation.

What else do we need to know about lifetime mortgages?

There are lots of things to consider, and that’s why it isn’t a two minute process. I don’t get an equity release mortgage done in an hour or two. It isn’t that quick.

It takes time for people to get their heads round it. I educate people and give them the information so they can make informed decisions. But it’s only by going through it slowly and methodically that they can reach the right decision for them.

We will always go at your pace. Some people might take a week or two to come to a decision. Some people might take months or over a year. I work with some ladies aged 85 that are absolutely switched on and bright as buttons, who know exactly what’s happening with all the finances. But it’s not rocket science, there’s just a lot to think about, and that’s why we’re here to help.

A lifetime mortgage is not suitable for everyone and may affect your entitlement to means tested benefits, so it is important to seek financial advice before taking any action. If you are considering releasing equity from your home, you should consider all options available before equity release.

The interest that may be accrued over the long term with a Lifetime Mortgage, may mean it is not the cheapest solution. As interest is charged on both the original loan and the interest that has been added, the amount you owe will increase over time, reducing the equity left in your home and the value of any inheritance, potentially to nothing.

Although the final decision is yours, you are encouraged to discuss your plans with your family and beneficiaries, as a Lifetime Mortgage could have an impact on any potential inheritance. We would also encourage you to invite them to join any meetings with your Financial Adviser so they can ask questions and join in the decision, as we believe it is better to discuss your decision with them before you go ahead.

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