Lifetime Mortgages – The Ultimate Guide

Lifetime mortgages are a sensitive subject for most, whether you are considering taking one or you are the next of kin worried about losing your inheritance. Over the years, lifetime mortgages have had varying degrees of popularity and for full transparency, they have attracted a lot of negative publicity in the past.

Is this perception warranted? Do lifetime mortgages leave your next of kin with no money? Is a lifetime mortgage a product worth considering?

Let’s address all about lifetime mortgages, the good, the bad, and the ugly.

What is a Lifetime Mortgage?

Lifetime mortgages are a type of equity release product available in the UK. As an equity release product, they are by far the most common and most popular mortgage.

The other product, a Home Reversion Plan is widely considered poor value for money and although worth comparing to a lifetime mortgage, most borrowers feel more comfortable with lifetime mortgages.

With a lifetime mortgage, you borrow money against the equity you hold in your property. Unlike a traditional mortgage product, there are no monthly payments.

The capital remains outstanding until you pass away or require long term care. The lender also charges interest on the loan. This interest accumulates over time or ‘rolls up.’

How is a Lifetime Mortgage Repaid?

Because of the nature of the product, it is possible to pass away and owe more money than your property is valued at. This however is a rare occurrence, and you can secure a lifetime mortgage with a ‘No Negative Equity’ guarantee through a reputable equity release broker.

When you pass away or need long term care, you can settle the debt yourself (if you are still alive) or your next of kin can settle the debt from your estate. If the funds in the estate do not cover the debt your next of kin can opt to:

• Repay the debt from their own funds and retain the property
• Or sell the property to repay the debt

Lifetime mortgage providers often work with your next of kin to agree an arrangement that is suitable in recouping the debt and helps your next of kin repay the loan.

The preference of lifetime mortgage companies is to reach an agreement because the alternative option for them is to sell the property at auction, which might not be as profitable.

The Perception of Lifetime Mortgages

Now, the elephant in the room. Lifetime mortgages have historically had a bad rap, mostly because decades ago, the industry was largely unregulated and cowboy firms were unscrupulous in their lending practices.

Today, the industry has cleaned up considerably and most lenders and equity release brokers are members of the Equity Release Council. The Equity Release Council underpins the industry commitment to higher standards and fairer treatment for customers.

Notwithstanding poor behaviour by some lenders in the past, there is also a more pragmatic problem with equity release. Whichever way you cut it; it is very rare for your next of kin to be happy with a diminished inheritance.

Some media coverage around equity release mirrors this reality with headlines like “My parent’s equity release left me without a penny.”

When seeking advice about equity release, advisers go to great lengths to explain the product not only to borrowers, but also their next of kin. Ultimately, if it is a product you feel is right for you, a reputable adviser will ensure everyone involved is comfortable.

Equity release is a delicate topic for all involved, however when done correctly it can provide a financial lifeline at a time in people’s lives where income typically drops.

The Equity Release Council

Addressing the bad behaviour in the past by rogue equity release lenders, the Equity Release Council was formed in 1991 with the goal of promoting a fairer industry.

Currently, over 90% of the equity release market subscribes to the Equity Release Council and agrees to adhere to the standards laid out by them.

This is fantastic as the standards are highly reassuring for borrowers. Unfortunately, there still remains lenders, providers and advisers who are not members of the Equity Release Council and can offer poorer products.

When discussing your equity release with a broker ensure they are a member of the Equity Release Council. An Equity Release Council approved broker will only recommend lifetime mortgages that meet the standards below.

What are the Equity Release Council’s Standards?

There are five core standards set by the Equity Release Council.

1. No Negative Equity Guarantee – if your property needs to be sold to recoup the cost, the lender cannot claim more than the value of the property.
2. The Right to Remain in Your Home for Life – once you have the lifetime mortgage, the lender cannot evict you and you can live without interference, in your property until all borrowers pass away or move to long term care.
3. The Right to Move Property – you can opt to move home, especially useful if you need to downsize for mobility issues. The lender must make all reasonable efforts to port the Equity Release product to your new home.
4. Repay Your Lifetime Mortgage Early – you will have the ability to repay partially, or in full, your equity release without payment penalties.
5. The Interest Rate Should be Fixed or Capped – your interest rate will be fixed by the lender or if they offer a variable rate, they must provide a cap (limit) to how much interest will be applied.

Who Qualifies for a Lifetime Mortgage?

In order to take a lifetime mortgage, you must be:

• Aged 55 or over
• Own all or most of your property with only a small mortgage remaining
• Have a property over the value of £75,000

If you have a small mortgage remaining, the lifetime mortgage provider may limit the amount of equity you can release. Sometimes a lender will insist you repay the mortgage.

A lender will have a specific threshold for existing mortgages on properties and if you exceed that, they will decline your equity release application. Your equity release broker will help find a lender who is okay with your current mortgage.

How Are Lifetime Mortgages Calculated?

Your equity release broker will ensure you meet a lender’s criteria.

For lifetime mortgages in joint names, both applicants need to be aged 55 or over and the equity release calculation will be based on the youngest applicant’s age.

They will factor in the value of the property and how much equity you are wishing to release. Currently a typical maximum you can release is 50% of your property’s value.

Health conditions can also impact the maximum borrowing sum available to you. If you have health conditions, which are likely to reduce your life expectancy, this can increase the sum available to you from the equity release provider. The reason for this is that an equity release provider’s risk exposure is largely based on when they are likely to receive their funds following a borrower’s death or movement to long-term care. By having health conditions that impact your life expectancy, the equity release provider is likely to receive their funds sooner than other borrowers with a longer life expectancy.

Alongside these basic guidelines, your equity release broker will also ascertain whether your property has anything unusual about it which could cause a lender to decline your application.

Properties must be:

• In a generally good state of repair
• Made from traditional building materials (brick walls, slate, or tile roof)
• Situated in an area the lender deems acceptable (some areas in the UK are deemed high risk for property values)

Can I Buy a House with a Lifetime Mortgage?

Yes, you can use the funds from equity release for a deposit or even an outright purchase of another property.

Of course, this is limited by the amount of equity you are able to release from your existing property.

For example, you could use your equity release funds to purchase a Buy to Let property and generate rental income. This would be subject to stamp duty on a second property.

Your equity release broker will be able to advise you personally if you wish to do this and outline the process.

You can also use the funds from your lifetime mortgage to gift a deposit to your next of kin to help them buy a home.

Can I Move Home with a Lifetime Mortgage?

If the lifetime mortgage you take has been packaged under the umbrella of Equity Release Council oversight, you should be able to move home and port (transfer) your equity release product.

This is subject to lender conditions, and you will need to ensure the value of the property you are moving to is sufficient to meet the lender’s requirements and covers the cost of the equity release. It must also meet the lender’s criteria.

If you are considering moving home with a lifetime mortgage, discuss this with your equity release broker who will be able to advise you further.

Pros of a Lifetime Mortgage

A lifetime mortgage can provide a critical lifeline for those looking to free up cash later in life.

Unlike traditional mortgages, you do not have any restrictions on how or when you spend your lifetime mortgage funds. They can be used to make a property purchase, buy the holiday of a lifetime, or simply ensure you maintain a good quality of life in retirement. As long as the funds are being raised for legal purposes, you can use them as you wish.

Lifetime mortgages also have no monthly payments unless you voluntarily make overpayments on the loan. Unlike regular mortgages, mortgage repayments are not mandatory with lifetime mortgage products. This is especially good if you have no next of kin and the debt has no impact on any future inheritance.

The way you receive the funds is flexible, you can choose to have the payment made in one lumpsum or opt to have regular payments with most lenders. Ordinarily, your equity release will be tax free, though this will depend on your personal tax circumstances, and you should consult with an accountant to ensure this is the case.

Cons of a Lifetime Mortgage

As outlined in this article there are negative aspects to a lifetime mortgage.

The main overriding negative occurs if you have a next of kin. Lifetime mortgages will always diminish any inheritance your next of kin would have received otherwise. With that said, how much money is lost from the estate depends entirely on how much equity release you take, how long the product runs for and whether you choose to make repayments.

You can also mitigate this loss of inheritance to the total value of your property by using a mortgage broker who is a member of the Equity Release Council. Council approved equity release brokers will only recommend lenders with the ‘No Negative Equity’ guarantee.

Finally, the other major negative are products and advisers operating outside of the high standards set by the Equity Release Council. These products can leave your estate with substantial debt, expose you to being evicted from your home or prevent you from downsizing or moving home.

These subpar products can also levy variable interest rates without any cap.

Alternatives to a Lifetime Mortgage

There are a number of alternatives to a lifetime mortgage, each with their benefits and drawbacks. It goes without saying that any financial product has pros and cons. By using a reputable whole of market mortgage broker, you will be recommended the product most suitable for your needs.

Home Reversion Plans are another form of equity release; however, they pay much less for the equity you release compared to a lifetime mortgage. This is because the lender buys the equity from you up front, below market rate. This lower offer for your equity is how Home Reversion Plans are profitable for lenders as there is no interest attached to the product.

If equity release is not your favoured option, you can also explore Retirement Interest Only mortgages. These are more traditional mortgage products and have stricter criteria compared to equity release. Interest rates and terms tend to be a little better with Retirement Interest Only mortgages however you will need to make a monthly interest payment.

Speak to an Expert

Equity release has changed over the last three decades and the industry overall has become fairer, more transparent and provides better value for money. There do remain some rogue advisers and lenders so you should ensure you are consulting with an adviser who is a member of the Equity Release Council.

Boon Brokers is a Whole of Market Mortgage, Insurance and Equity Release Broker that is a proud member of the Equity Release Council. Boon Brokers provides fee free equity release advice.

Contact Boon Brokers to book your equity release consultation today.