What Is a Lifetime Mortgage? How It Works, Eligibility & Benefits (2024)

What Is a Lifetime Mortgage?

A lifetime mortgage is an "equity release" arrangement, primarily in the U.K., that allows homeowners to withdraw equity from their home while continuing to live in it. The borrowed amount must be repaid with interest, but payment is not due until the homeowner sells the property or moves into a residential care facility. Lifetime mortgages are available to homeowners age 55 and older who meet certain eligibility requirements. In the United States, a similar loan product is called a reverse mortgage or home equity conversion mortgage (HECM).

How a Lifetime Mortgage Works

A lifetime mortgage allows eligible homeowners to withdraw some of their home equity in cash. Homeowners may opt for installment payments or a lump sum; the money can be used however they see fit. The home acts as collateral or security for the loan.

Interest accrues on the borrowed amount, which generally does not need to be repaid as long as you live in the home. Should you sell the home, move into a residential care facility, or pass away, the loan would become payable in full.

Again, this is similar to how a reverse mortgage works in the U.S. Homeowners can withdraw some of their equity and use it for medical bills, day-to-day living expenses, or other financial needs. The reverse mortgage accrues interest but does not need to be repaid as long as the homeowner is still living in the property.

Benefits and Drawbacks of a Lifetime Mortgage

Lifetime mortgages can offer advantages, but there are some risks to be aware of. Comparing both sides can help you decide if this path is right for you.

Advantages

• You can continue living in the home for as long as you like, with no monthly payments required toward the loan.
• Lifetime mortgages allow you to withdraw equity tax-free while giving you the flexibility to use the money as you see fit.
• Your lender may allow portability, meaning that if you move to a different property you can take your lifetime mortgage with you.
• There's no fixed or set term in which you need to repay the amount borrowed.
• Firms advertising or selling lifetime mortgages are subject to regulation, which is designed to protect consumers.
  

Disadvantages

• Interest will accrue, increasing the total amount that must eventually be repaid.
• Taking out a lifetime mortgage can reduce any inheritance you leave to your heirs since the debt must be repaid from your estate when you pass away.
• Repaying a lifetime mortgage early could trigger penalties.
• Receiving funds through a lifetime mortgage could have a negative impact on your eligibility for government aid, including the pension credit.

How to Qualify for a Lifetime Mortgage

You'll need to meet certain requirements to be eligible for a lifetime mortgage. Eligibility depends on your age, your home, and your financial situation.

Age Restrictions

There's a minimum age requirement for a lifetime mortgage. Generally, you must be 55 or older to borrow. This limit applies to both parties if you're applying for a lifetime mortgage with a co-borrower.

A separate, higher limit applies for those seeking equity release through home mortgage reversion. Home reversion allows you to sell part of your home while living in it. The minimum age for that is 60.

Property Criteria

Your home must also meet certain requirements to qualify for a lifetime mortgage. The property must be:

• Located in the U.K.
• Your main residence
• In reasonable condition
• Owned free and clear

The home must also be above a certain value.

In addition, certain types of properties may not be eligible. Those can include:

• Studio or basem*nt flats
• Flats of maisonettes in a local authority or housing authority block of more than four stories
• Retirement properties
• Static/mobile homes
• Houseboats
• Farms
• Hotels
• Guest houses/B&Bs

Note that if your home is downvalued, meaning it's valued below the amount you expect, you may be able to appeal the decision to qualify for a lifetime mortgage.

Financial Assessment

Your age and the value of your property influence the amount you'll be able to borrow with a lifetime mortgage. The percentage typically increases with age. Some equity release providers may also offer larger amounts for those with certain medical conditions.

Interest rates may be fixed or variable. If the rate is variable, there is an upper limit at which it must be capped. You may have to pay upfront fees at the time you take out a lifetime mortgage, including:

• Application or administration fees
• Advisor fees
• Surveyor fees
• Legal fees

Fees can vary widely so it's important to compare them across different plans and providers to find the most affordable option.

Types of Lifetime Mortgages

There are several types of lifetime mortgages you might choose from. Your age, income, and financial needs can determine which one is most appropriate for your needs.

Lump Sum Lifetime Mortgage

With a lump sum lifetime mortgage, you receive a single payment, which you can then spend as needed.

Choosing a lump sum option means you get all the money at once; you don't need to wait for the next installment. The drawback is that you'll have to pay interest on the entire lump sum, even if you don't use all of the money.

Drawdown Lifetime Mortgage

A drawdown lifetime mortgage lets you take smaller payments from your equity as needed. There may be a minimum amount you're required to withdraw each time.

You might prefer this option if you'd like to spread the distributions out over time or are uncertain how much money you might need. With this type of arrangement, you'd only pay interest on the amount you withdraw.

Interest-Only Lifetime Mortgage

With an interest-only lifetime mortgage, you would make interest payments toward the loan during your lifetime. Paying some of the interest now means less debt to repay later.

If your provider offers the option to make interest-only payments these would be due monthly. The amount you pay would be designed to fit your income. Your provider should review your finances to ensure that the payments are affordable for you.

Repayment Options and Flexibility

Lifetime mortgages allow for some flexibility regarding repayment. The options you'll have available can depend on your choice of provider.

Voluntary Repayments

Voluntary repayments are amounts you pay during your lifetime to reduce your loan balance. Making voluntary payments toward a lifetime mortgage means there will be less for you or your heirs to repay later.

There may be a maximum amount you're allowed to pay voluntarily. As long as you stay within the allowed thresholds, your provider may not charge any penalty fees for repaying your lifetime mortgage early.

Downsizing Protection

Downsizing protection allows you to move to a smaller property without triggering any early repayment charges. For instance, you may choose to move to a different property because of cost concerns or if a health condition requires a more accessible layout.

Your provider must approve the new property for you to avoid any early repayment fees. There may be a certain minimum value threshold the property must meet and some types of homes may be denied for a penalty waiver.

Equity Release Council Standards

The Equity Release Council, which describes itself as a "consumer-centric trade body," says it exists to ensure that equity release providers act ethically and with integrity when offering lifetime mortgages. The council sets standards and principles for its member lenders and providers.

Here are some of the most important standards to know about when considering a lifetime mortgage.

• Providers must cap variable rates, and the upper limit cannot change for the life of the loan.
• There must be a "no negative equity guarantee" so you or your heirs will not be responsible for any outstanding balance owed once the home sells.
• Homeowners must have the right to move to a new property as long as it's acceptable to their provider.
• You must have the right to remain in the property for life or until you need to move to nursing care.

You have the right to choose a solicitor to guide you through the process of obtaining a lifetime mortgage. Your provider must be fully transparent in providing with you details of your agreement.

Alternatives to a Lifetime Mortgage

A lifetime mortgage is just one way to access home equity. There are several other possibilities you might consider for equity release.

Home Reversion Plans

As mentioned, home reversion plans allow you to access some or all of your equity while continuing to live in your home rent-free. The provider purchases all or part of the home, factoring in your age and health, and gives you a lump sum of cash or installment payments. This money is tax-free and you also get a lifetime lease, which means you can stay put for the rest of your life.

There are no restrictions on leaving the house. At the end of the plan, the home is sold. The proceeds are divided between the home reversion company and your heirs. The split is based on the ownership share each one holds.

Other Equity Release Options

If you're unable to qualify for a lifetime mortgage or simply want another option, you might consider tapping into your home equity through mortgage refinancing or a retirement interest-only mortgage.

Refinancing allows you to replace an existing loan with a larger new one and take out some equity in cash. Retirement interest-only mortgages allow you to tap into your equity and make interest-only payments toward the loan each month. If you're considering either type of loan, it's important to compare mortgage rates.

The Bottom Line

Lifetime mortgages are designed to provide homeowners with supplemental cash to help with medical bills, living expenses, and other financial needs. In the U.S., eligible homeowners may choose a reverse mortgage for the same purpose. If you're weighing a lifetime mortgage or any other form of equity release, it's helpful to get professional advice to ensure you understand what you're agreeing to and how it might affect you financially now and in the future.