Equity release products allow people over the age of 55 to release cash from their properties and continue living in them for as long as they wish. The most popular type of equity release product on the market is a lifetime mortgage. We explore what a lifetime mortgage is and whether it's right for you below.
What is a lifetime mortgage?
Lifetime mortgages are essentially long-term loans secured against your property. But, unlike other types of secured loans, you do not have to pay them off until after you go into care permanently or until you die. In addition to this, as you are simply using the property as security, you can continue to live in your home.
To be eligible for a lifetime mortgage, you typically need to be at least 55 years old and your property needs to have a minimum value of at least £70,000.
If you are eligible, you can usually take out a loan equivalent to between 20% to 60% of your property's true value. Typically, 60% loans are only available to older applicants or those with a significant health condition.
However, interest will accrue on this loan for its lifetime. And, because with these types of arrangements, people do not need to pay off any of the loan until after the property is sold, compound interest can accrue quickly.
That's why some people choose to forego the cash lump-sum and opt for a drawdown approach to lifetime mortgages instead. We explore the differences below.
Lifetime mortgages: Drawdown vs lump-sum
When you take out a lifetime mortgage, you can usually opt to take the full amount in one lump sum, or take out a smaller amount initially and then draw down cash from the loan as and when you need to do so.
A good reason to opt for the drawdown approach is that interest accrues only on the amount you withdraw from the point when you withdraw it, rather than the full sum. On the other hand, if you take the full amount as a lump sum when you take out a lifetime mortgage, interest accrues from day one.
As such, if you know you won't need all of the cash immediately, a drawdown approach can be a good way to limit the amount of interest that accrues on your loan. If you do need the full amount immediately, you may be able to pay off the interest on the product to prevent it from compounding much like you do with an interest-only mortgage.
Benefits of lifetime mortgage equity release
Lifetime mortgages can be the right choice for some people. Here are some of the key benefits of lifetime mortgages.
Get tax-free cash to fund your retirement
Lifetime mortgages can be a good way to boost your pension pot with tax-free cash that can fund your retirement. There is no tax on the money you receive through an equity release product which means you get the cash in full and can use it however you like.
Flexible way to access money
With lifetime mortgages, you can choose whether you take the cash as one lump sum or in smaller chunks as and when you need the money. This means that if you need to fund a renovation project, for example, you can access the full sum right away. But, if the equity release product is a way to boost your retirement, you can take the money as and when you need it, making budgeting easier.
Stay in your own home and access its equity
Lifetime mortgages allow you to continue living in your home and access a portion of its equity at the same time. You won't have to pay any of the loan back until after you move into permanent care or die. Then, the lender will receive what they're owed from the sale of the property. As such, it could be a good way to take out a loan because you don't have to worry about repaying it while you are healthy and still living there. That being said, your estate will be reduced and the inheritance you leave behind will be impacted.
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Drawbacks and considerations
While lifetime mortgages do come with a range of benefits, there are some important drawbacks to consider as well.
Compound interest can add up quickly
One of the biggest drawbacks of lifetime mortgages is the compound interest which can add up over time.
To help you understand the implications, the table below highlights the effect that compound interest can have on a relatively small loan of £50,000 over a few decades.
This assumes you take out the loan as a lump sum and you do not make payments towards it over time.
| Year | Compound interest at 6% |
| 0 | £50,000 |
| 5 | £66,911.28 |
| 10 | £89,542.38 |
| 15 | £119,827.91 |
| 20 | £160,356.77 |
| 25 | £214,593.54 |
| 30 | £287,174.56 |
As you can see, a small £50,000 loan can end up costing you nearly £300,000 in 30 years' time.
So, if you took out a £50,000 loan when you turned 55 and continued living in your property until you were 85, your estate could end up owing nearly £250,000 in addition to the original loan. This would need to be paid from the sale of your home and depending on how much the home sells for, there might not be much left over for your family afterwards.
There are ways to reduce the final balance, such as taking smaller amounts as and when you need it (drawing down the loan) or by paying off the interest each month so it doesn't have a chance to compound.
Your estate will be reduced
Regardless of the type of equity release product you choose, your estate will be reduced because you are giving away some of the equity in your home in exchange for cash. Compound interest aside, this means you might not be able to leave the inheritance you had hoped to leave behind as there will be less to give your family after the loan has been paid back.
You may lose your entitlement to certain state benefits
If you are claiming any means-tested state benefits, an equity release product could mean you lose your entitlement to these benefits because your overall assets increase. If you have more than £10,000 in savings, for example, you could see your pension credit reduced.
Some of the benefits you could lose include:
- Pension credit (but not the state pension as this isn't a means-tested benefit)
- Winter fuel payments (which are now means-tested)
- Universal credit (if you're under the State Pension age)
As such, if you're currently claiming means-tested benefits, it's worth making sure that you'll be better off with the equity release cash before going down that route.
How lifetime mortgages work
Taking out a lifetime mortgage typically takes around 8 weeks from initiating the process to receiving your cash on completion. If you are interested in a lifetime mortgage, there are several steps you'll need to take before you can take out the product.
- Consult with a financial advisor - Anyone considering taking out an equity release product must have a consultation with a financial advisor. This is an FCA requirement and it's designed to ensure you understand the full implications of taking out the product. Your financial advisor will also look at your circumstances to help you decide whether equity release is right for you.
- Submit your equity release application and instruct your solicitors - Once you have decided that the equity release product is right for you, you'll need to submit your equity release application and instruct your solicitors to act on your behalf in the property transaction.
- Get your property valued - You'll then need to have your property valued to establish the true market value of your home. This will help your lender decide how much to offer you.
- Get your offer and get legal checks done - After the valuation, you will receive your equity release offer and legal checks will take place before a completion date is set.
- Completion date - You will receive your funds on completion and any fees you owe (such as for financial advisors, solicitors, application fees, and valuation fees) will need to be paid at this point too.
That's it. You won't need to pay off your loan until you move into permanent care or die. And even then, the loan will be repaid from the sale proceeds of your home.
While compound interest can add up quickly, most reputable equity release products come with a no-negative equity guarantee which means you will never owe more than what the home is worth when sold. So, at most, your lender can claim the full proceeds of the sale to recoup their costs.
FAQs about lifetime mortgages
What are the pitfalls of a lifetime mortgage?
One of the key pitfalls of a lifetime mortgage is the compounding interest that accrues if you do not make any payments towards your mortgage.
To give you an idea, a £70,000 loan at 6% can end up costing £300,000 in 25 years if you do not pay off the interest as you go. This means you will accrue around £230,000 in interest for the sake of a £70,000 cash lump sum.
Your family will then need to pay off the £300,000 from the sale of the home, significantly reducing their inheritance in the process. All equity release products reduce your estate, but compound interest can make a significant dent in any future inheritance.
How much equity can I release with a lifetime mortgage?
The amount of equity you can release from a lifetime mortgage depends on several factors such as your age and the value of your home. Typically, you need to be at least 55 to access a lifetime mortgage and your home needs to be worth at least £75,000. However, the older you are, the more equity you'll usually be able to release.
Lifetime mortgage products usually offer you between 20% to 60% of the value of your property as a loan. If you're in your 50s, you're likely to be offered closer to 20%, but if you're older, you could be offered up to 60%.
How does a lifetime mortgage work?
A lifetime mortgage allows you to continue living in your home while releasing up to 60% equity via a secured loan, payable from the proceeds of the house sale when you move into permanent care or die.
To get a lifetime mortgage, you will need to speak to a qualified financial adviser to decide whether it's the right product for you. You'll then need to either work with a broker or do your own research to find the best product for your needs. There will be fees you'll need to budget for to take out the product, including potential fees for the financial adviser, broker, solicitor, and valuations. In some cases, some of these fees can be added to your loan meaning you won't need to pay the money upfront.
Is there a better alternative to equity release?
Sometimes, there are better alternatives to equity release depending on your needs. If you have a large home and no longer need all the space, you might find that downsizing is a good way to release some of the equity in your home and it has the added benefit of you getting the true market value of your property. It could mean moving to a smaller home or to an area where similar-sized homes are cheaper. Doing so would mean you get a lump sum as well as you fully owning your new property.
Other options include selling your other assets or even renting out a spare room if you're willing to take on a lodger. We cover a range of equity release alternatives in our article on the topic.
