How does a lifetime mortgage work?

What is a lifetime mortgage?

A lifetime mortgage is a loan secured against your home. It is the most common form of equity release and is usually available to homeowners aged 55 or over who meet lender criteria.

Unlike a standard residential mortgage, there is not usually a fixed end date where you must repay the full balance from income. Instead, the loan is normally repaid when the last borrower dies or moves permanently into long-term care. The property is usually sold, and the sale proceeds are used to repay the loan and any interest.

You normally keep ownership of your home. This is different from a home reversion plan, where you sell part or all of your property to a provider. With a lifetime mortgage, the lender does not own your home, but the loan is secured against it.

Why people use lifetime mortgages

Homeowners may consider a lifetime mortgage to repay an existing mortgage, make home improvements, support family, increase retirement funds or create a cash reserve. The money is usually tax-free, although how it is used or held may have other consequences.

The important question is not just how the mortgage works, but whether it is suitable. The long-term cost, impact on inheritance, benefits, future care and alternatives all need to be reviewed.

How the money is released

A lifetime mortgage can usually be arranged as a lump sum, drawdown facility or a combination of both. A lump sum gives you an amount upfront. Drawdown allows you to take an initial amount and then release further funds later, subject to the lender???s terms and availability.

Drawdown can sometimes reduce the amount of interest that builds up, because interest is usually charged only on the money actually released, not on funds left unused in the reserve. However, future drawdown is not always guaranteed on the same terms, and lender rules can change.

The amount available depends on several factors. These usually include your age, property value, property type, health and lifestyle information, existing mortgage balance and lender criteria. Older borrowers can often release a higher percentage of the property value, but this does not mean borrowing the maximum is always sensible.

If you already have a mortgage or secured loan, this will usually need to be repaid as part of the process. The remaining money, if any, can then be used for your intended purpose. A regulated adviser should check whether the amount released is appropriate and whether a smaller or staged release may be more suitable.

How interest works

Interest is charged on the amount borrowed. With many lifetime mortgages, you can choose not to make monthly repayments. If you do this, the interest is added to the loan. This is known as rolled-up interest.

Rolled-up interest can grow significantly over time because interest may be charged on the original loan and on interest already added. The longer the plan runs, the greater the potential impact on the equity left in the property.

Some lifetime mortgages allow voluntary repayments. These may be monthly, ad hoc or limited to a certain percentage each year. Making payments can help reduce the amount of interest that rolls up, but the rules vary between lenders. Some borrowers choose to pay interest, make partial repayments or let the interest roll up entirely.

When is the loan repaid?

The loan is normally repaid when the last borrower dies or moves permanently into long-term care. At that point, the property is usually sold. The lender is repaid from the sale proceeds, and anything left goes to the estate or beneficiaries.

If there are two borrowers, the plan usually continues until the second borrower dies or moves permanently into care. This is an important protection for couples, because the surviving borrower can usually remain in the property as long as the terms are met.

Can you move home with a lifetime mortgage?

Many lifetime mortgages are designed to be portable, meaning you may be able to move home and take the plan with you. However, the new property must meet the lender???s criteria. If the new property is lower in value, unusual in construction or harder to sell, the lender may require a partial repayment or may not accept the move.

This matters if you may want to downsize, move closer to family or relocate for health reasons. A lifetime mortgage should be checked against your future moving plans, not just your current needs.

What protections may apply?

Plans that meet Equity Release Council standards include important safeguards, such as a no negative equity guarantee. This means that, provided the property is sold for the best price reasonably obtainable and the terms have been met, you or your estate should not owe more than the property is worth after sale costs.

Other features may include fixed or capped interest rates, the right to remain in the home for life or until long-term care, and the ability to make repayments subject to lender criteria. These protections are important, but they do not remove all risks.

What can go wrong?

The main risk is that the balance grows and reduces the estate. You may also face early repayment charges if you want to repay early. Means-tested benefits could be affected if released money increases your capital. Your options may also be limited if you need to move to a property the lender will not accept.

That is why the advice process should include alternatives, family considerations, future care planning, benefit checks and realistic projections of the future balance.