Unlocking financial freedom: an introduction to lifetime mortgages for over 55s

Lifetime mortgages explained – what they are, how they work and whether this type of equity release is right for you

happy couple in kitchen, lifetime mortgages 2023

Lifetime mortgages explained 

As individuals enter their golden years, financial planning can take on a renewed significance. For many over 55s, the concept of lifetime mortgages emerges as a compelling avenue to unlock the value of their property and bolster financial well-being. In this guide, we delve into lifetime mortgages, offering an introduction tailored to those navigating their retirement years.

Defined as a type of equity release, a lifetime mortgage enables homeowners aged 55 and above to access a portion of the equity tied up in their property, without the need to sell or vacate their home. According to Which, lifetime mortgages are the most popular type of equity release, and data from the Equity Release Council indicates that customers accessed £535m in property wealth via equity release products between October and December 2023, with an annual total of £2.6 billion. 

Understanding the nuances of a lifetime mortgage is paramount. Before deciding whether a lifetime mortgage is right for you, you should talk to a later-life broker. Responsible Equity Release, which is the provider of the Telegraph Media Group Equity Release Service, is available to help you consider all the options and understand the steps involved. 

“Whether the customer wishes to top up their pension, support their family or manage their borrowing in retirement, today’s products offer more flexible options to help manage costs, with voluntary repayments baked into every new plan. Ultimately it is about choice and it is vital that people plan carefully for the future and only commit to long-term products after careful consideration, expert advice and consulting with loved ones.” 

David Burrowes, Chair of the Equity Release Council

What are the different types of lifetime mortgages?

 

There are two different types of lifetime mortgages. You can either borrow a lump sum, or an initial lower amount, together with an interest-free reserve that can be accessed in the future - otherwise known as a drawdown.

Lump sum lifetime mortgage

A lump sum allows you to release a one-off, tax-free, cash lump sum from the value of your home. It gives you the option to spend all the money you release at once, you can fix the interest rate for life and make voluntary payments. 

Drawdown lifetime mortgage

A drawdown allows you to release a smaller, tax-free cash lump sum from the value of your home, together with the option of accessing the remaining equity available to you at a later date or dates. A drawdown lifetime mortgage can be a popular choice for those who want to reduce the overall cost of their borrowing. This is because you only pay interest on the funds you draw down. You are also guaranteed the right to make voluntary payments here. 

Do note, if you opt to release money from the reserve, interest will be charged on the additional amount released at the prevailing rate.

How does a lifetime mortgage work?

 

The amount you can borrow depends on your age and how much your home is worth. Interest accumulates on the borrowed amount, tailored to factors such as age and property value, while you retain full ownership.

With a lifetime mortgage, you can live in your home until you pass away or move into long-term care, at which point the property is usually sold to settle the loan. Providers typically offer equity release up to a maximum of 60% of the value of the house, although the actual percentage that could be available to you will depend on the age of the youngest homeowner.

The cost of borrowing via a lifetime mortgage can be high because of the way interest compounds over time. Unlike ordinary mortgages, you don't have to make monthly repayments on a lifetime mortgage. However, there are a variety of features available to help control the costs, including voluntary payments and tailoring your release to only access funds when they are needed. An adviser is best placed to explore the cost of releasing equity with you. 

Derek and the lifetime mortgage

 

Worked example for illustrative purposes only

Let's say Derek is considering a lifetime mortgage at the age of 60 in order to access cash from his valuable property. Here's a simplified example of how it might work:

  • Loan amount and interest rate: Derek takes out a £20,000 lifetime mortgage at an interest rate of 6% on his £250,000 home.
  • Increasing debt: With a lifetime mortgage, Derek doesn't have to make monthly repayments on the loan amount itself. However, the interest gets added to the loan balance, which increases the total amount Derek owes over time. In this simplified example, the loan amount roughly doubles every 12 years.
  • Impact over time: If Derek lives until 72, he might owe £41,000 (initial loan + accumulated interest). If Derek needs to sell his house at 84 to move into a care home, he will potentially owe £84,000 (initial loan amount compounded over the years).

This can be mitigated somewhat by making voluntary partial repayments each year. You are usually allowed to make penalty-free payments up to 10% of the mortgage value per year, reducing the borrowing costs.

If house price growth is strong throughout the period of your lifetime mortgage, you could still end up with a substantial amount of equity in your property, even after your outstanding debt is settled. 

The opposite scenario is also possible. However, members of the Equity Release Council comply with its 'no-negative-equity guarantee', which ensures that you'll never have to repay more than the value of the property. If the loan plus interest due is more than the value of your property, your family will not have to pay the shortfall. 

Is a lifetime mortgage right for you?

 

To be eligible to release equity from your home you must:

  • Be aged 55 or over

  • Own your own home

  • Be mortgage free or able to clear your mortgage using the equity released

  • Own a home worth at least £70,000 depending on your property type

  • Want to release at least £10,000

 How do I take out a lifetime mortgage and how much can I borrow? 

 

You can only get a lifetime mortgage through a qualified equity release adviser. Responsible Equity Release provides an advice service to homeowners, and you can find out how much you could release with their help by using the calculator on this page. It will show you an estimate of the minimum and maximum amounts that could be available. 

It’s worth noting that, as well as the actual cost of the interest, you'll have to pay a number of fees – potentially between £1,500 and £3,000, depending on the type of plan being arranged – which will include arrangement and valuation costs, as well as fees for legal work and a surveyor. Your adviser will talk through the setting up costs of a lifetime mortgage before you proceed. 

FAQs

 

 When do you have to pay off a lifetime mortgage?

Your lifetime mortgage would usually be paid off through the sale of your property when you pass away or move intolong-term care. If you take out a joint plan, when the first of you passes away or moves into care, the partner can continue to live in the property. Only when the second borrower passes away or moves into care is the property usually sold to pay back the loan.

All providers that are members of the Equity Release Council abide by a ‘no-negative-equity’ guarantee. This means that should the loan plus interest due total more than the value of your property, your beneficiaries will NOT be liable to meet the shortf.

Some lifetime mortgage products even let you ring-fence some of the value of the home to guarantee an inheritance.

What happens if I want to repay it early?

It's possible to do this but most plans aren't set up to be repaid until you, and your partner if a joint mortgage, pass away or enter long-term care. 

Deciding to repay your loan early often triggers an early repayment charge. The amount depends on how long you’ve had the loan. Most products apply penalties on a sliding scale, reducing over a number of years.

If you want to make partial repayments, you can do this penalty-free for lifetime mortgages that meet standards set by the Equity Release Council. These are often limited to 10 per cent of the loan per year.  However, to save money you could choose to switch your lifetime mortgage to another provider offering a lower rate in the future. You will need to seek out advice again if you want to do this, and your adviser will calculate whether any potential savings are worth it. 

Can I sell my home after borrowing with a lifetime mortgage?

Another Equity Release Council guarantee is portability, meaning that lifetime mortgage providers will allow a product to be transferred to another property, but only if the new property can act as acceptable security. A provider policy may rule out age-restricted or leasehold retirement housing. If you move to a lower-value property, you must usually repay part of a lifetime mortgage from the proceeds of selling your old home. Tell your adviser if this is potentially in your future, as there might be product options that wave early repayment charges if you are downsizing.

Can I rent out my home after borrowing with a lifetime mortgage?

With a lifetime mortgage, renting out part of your property is not usually permissible. Speak with your adviser if you are planning to do this and they will explore whether any products would allow you to do this. If you do end up renting part of your home, and you decide to move out and let the entire property to tenants, you would have to repay the loan in full. This is because a condition of a lifetime mortgage is that the property remains your primary residence

Which providers offer lifetime mortgages?

A full list of Equity Release Council member providers can be found here.

Find out more today

 

If you think that a lifetime mortgage is right for you, it is essential that you seek trustworthy and professional advice.  Telegraph Media Group has partnered with expert later-life broker, Responsible Equity Release, to provide the guidance you need. Responsible Equity Release will offer advice on lifetime mortgages from lenders that are members of the Equity Release Council, guaranteeing a range of product standards.

Useful contacts: 

Equity Release Council: Not-for-profit industry body for different types of firms involved in equity release. Phone: 0300 012 0239.

Financial Conduct Authority (FCA) register: 

The Financial Services Register is a public record that shows details of firms, individuals and other bodies that are, or have been, regulated by the FCA.

Read more:

Important information – please note Telegraph Media Group is not authorised to provide advice or arrange equity release products, so we have partnered with a leading equity release specialist to provide this service to youThe above article was created for Telegraph Financial Solutions, a member of The Telegraph Media Group. For more information on Telegraph Financial Solutions click here. 

Equity release is only available to homeowners that own a property within the United Kingdom.

The Telegraph Equity Release Service is provided by Responsible Equity Release. Responsible Equity Release is a trading style of Responsible Life Limited. Responsible Life Limited is authorised and regulated by the Financial Conduct Authority and is entered on the Financial Services Register (https://register.fca.org.uk/) under reference 610205. 

Only if you choose to proceed and your case completes will Responsible Life Limited charge an advice fee, currently not exceeding £1,690.

Information correct at date of publication.