What is a lifetime mortgage?

• Do you own your home?
• Would you like to release equity on your property to provide for a comfortable retirement?
• Would you like a loan without having to make any repayments?

If so, a lifetime mortgage might be the right mortgage for you.

Lifetime mortgages are also referred to as cash release plans and roll-up mortgages.

How does a lifetime mortgage work?

A lifetime mortgage is a type of equity release scheme that allows you to take out a mortgage secured against your property. In your later years you may find that you have a lot of money tied up in your home but you don’t have much cash available for your retirement plans. With a lifetime mortgage you are given a lump sum or a monthly income (or a combination of the two) without having to worry about paying it back. Instead, the amount you borrow (plus interest) is taken out of the proceeds made from selling your house after you pass away.

You must be at least 55 years old to qualify for a lifetime mortgage (some lenders require you to be 60 years or older).

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What kinds of lifetime mortgages are available?

There are different types of lifetime mortgages, including:

• Interest-Only Mortgages: You only pay interest each month and pay off the actual loan when the property is sold (when you either move or pass away).
• Roll-up Mortgages: Instead of making interest payments each month, your interest is “rolled up” and paid off with your loan amount when your property is sold. Remember that interest builds up quickly, so be prepared for how much you’ll have to pay back in the end.
• Fixed Repayment Plans: You and your lender agree on an amount higher than the lump sum you borrow. You don’t pay any interest on your loan, but when the property is sold the lender will take back the higher amount you agreed on. The longer you live, the better deal you’ll get.
• Home Income Plans: You use the lump sum you receive from the lender to buy an annuity - an investment product that provides you with an income for life (usually a fixed income). This income is used to pay off your interest on the loan (deducted automatically) and provide you with extra cash for your retirement. Keep in mind that built-in annuities are not always the most competitive deals, so shop around. This scheme is not suitable if you are in need of a lump sum of cash since the annuity only provides you will a small income per month. Typically, these plans are really only suitable for elderly homeowners.
• Shared Appreciation: (currently not available) In exchange for 0% interest (or a small interest rate), you and your lender agree on a percentage of the increased value of your home. When your loan is paid back, the lender will also take the agreed percentage of your home’s appreciation. Therefore, your loan could feasibly cost you nothing if your home’s value doesn’t increase, but it could come at a high price if your property value sky-rockets. Lenders used to make huge profits from this scheme due to the housing boom. This scheme may become available again in the future.

To find the right type of lifetime mortgage that best suits your lifestyle, contact a professional mortgage adviser who can look over your financial situation and guide you to the best lifetime mortgage.

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Am I putting my home at risk?

No. You still own your property even though you have released equity. Additionally, lifetime mortgages are protected by Safe Home Income Plans (SHIP), which guarantees that you can live in your home for the rest of your life. Lifetime mortgages are also protected by the Financial Services Authority (FSA), which regulates every detail of lifetime mortgages. SHIP members will only accept business from an adviser who is qualified in lifetime mortgages. Therefore, you should speak to a professional adviser who has a CII Certificate in Equity Release and is authorised by the FSA (you can check if they are authorised at www.fsa.gov.uk/register). For more information about these services, please see equity release schemes.

You will also be offered a “no negative equity” guarantee that ensures your final debt will not exceed the value of your property upon the time of sale. This guarantee protects you against falling house prices or high interest rates. You can take out a lifetime mortgage with the assurance that you’ll leave no debt behind.

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How much can I borrow with a lifetime mortgage?

The amount you can borrow depends on your age and the value of your home. The older you are, the more money you’ll be offered. Equity release companies expect a return sooner if your life expectancy is shorter, so they feel more comfortable offering you more money if you are in your 70s or 80s as opposed to your 60s.

Typically, lifetime mortgage providers won’t offer you any more than 50% of your property’s value. Usually you will be offered between 30% and 40%. However, your percentage may rise over time. For example, if you take out a lifetime mortgage at 60 years old you may be offered 20% of your property value. Each year you may increase by 1%, so by the time you are 80 years old you will have access to 40% of your property value.

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How do I receive the lifetime mortgage money?

You can get the money as a lump sum, monthly income, or a combination of the two. Your age will most likely guide your decision about how you will receive your money. If you are older, a monthly income may not be the best option since you may never receive your full amount.

Another option is a drawdown lifetime mortgage, which allows you to access certain amounts of your loan whenever you need it. This option is particularly useful to save on interest payments since you will only pay interest on the amount you have borrowed up to present. The remainder of the loan you haven’t accessed yet will not be charged with interest.

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How do I pay back the lifetime mortgage loan?

You can get interest only lifetime mortgages wherein you pay interest monthly, but lifetime mortgages are also offered with “rolled up” interest. “Rolled up” interest is paid off all-together in one final payment along with the total amount of your loan when your property is sold. If you decide to go for the “rolled up” interest option, keep in mind that the interest is compounded so you will have to pay interest on your interest.

Lifetime mortgages are offered on fixed rates and variable rates, but most borrowers opt for the security of the fixed rate.

Unfortunately there is no way to know what your final payment will be with a lifetime mortgage. The longer you live, the more interest you will accrue, which will in turn be deducted from your estate when you pass away.

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Are there disadvantages in getting a lifetime mortgage?

The big disadvantage is the uncertainty of what funds you will have to pass on to your benefactors. Accumulating interest payments will cut into the inheritance you leave behind. You will have to take a gamble on how long you will live and how high interest rates will reach. However, you may use your lifetime mortgage loan to give your family and friends financial support while you are still alive, in which case an inheritance may not be as important. Furthermore, you may not feel the need to leave an inheritance to anyone.

Some lifetime mortgages offer a protected equity option that allows you to reserve some of your equity to use as an inheritance. No matter what option you are considering, you should speak to your family to make sure they support your big financial decision. A lifetime mortgage is a lifetime commitment (you will face high early redemption charges if you end the mortgage early), so make sure everyone is happy with your plan. Also, talk to a professional adviser who can let you know if there are other options that can guarantee an inheritance or offer you more money in your retirement.

If you do feel the need to guarantee a certain amount as an inheritance, you may want to consider home reversion plans.

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How to get a lifetime mortgage in the UK

Just fill in this short form and a mortgage adviser will contact you to answer all of your questions, give you lifetime mortgage advice, and get you on your way to earning money towards your retirement.

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