Understanding Lifetime Mortgages
What is a lifetime mortgage?
A lifetime mortgage is a type of long-term loan available to homeowners aged 55 or over. It allows you to release tax-free money from the value of your home without selling it or making regular repayments.
The loan is secured against your main residence and is usually repaid in full, with interest, when you die or move permanently into residential care.
How do they work?
You remain the legal owner of your home for life. There is no requirement to repay the loan during your lifetime, although some plans offer the option to make voluntary repayments. The money can be taken as a lump sum, through smaller withdrawals over time, or a combination of both, depending on the product.
How interest works
Interest is charged from the day the funds are released. Unless you choose to make repayments, the interest is added to the outstanding balance over time. This means you pay interest on the loan and on any previously accrued interest, a process known as compound interest.
For example, borrowing £80,000 at 6.3 percent annual interest with no repayments results in a balance of over £170,000 after 15 years. If the property is sold for £300,000, the remaining £130,000 passes to your estate. If the value of the property is insufficient to cover the loan, the no negative equity guarantee ensures that your estate does not owe the difference.
Some products allow you to repay interest or capital voluntarily, up to a fixed annual limit. Doing so reduces the total cost and preserves more of your home’s value for your estate.
When the loan is repaid
The loan is usually repaid when the last borrower dies or moves permanently into residential care. At that point, the property is sold and the proceeds are used to repay the original loan plus any accumulated interest.
If any equity remains, it passes to your estate and is distributed according to your will or the rules of intestacy.
Portability of the Loan
If you move house before that point, the loan can usually be transferred to a new property, provided it meets the lender’s criteria. If the new property is worth less, or is not acceptable to the lender, part of the loan may need to be repaid.
Eligibility and how much you can borrow
Eligibility criteria vary by lender, but typically require:
- You are aged 55 or older
- You own a qualifying home in the UK
- The property is your main residence
- The property meets minimum value and condition requirements (often £70,000 or more)
The amount you can borrow depends on your age and the value of your property. Older borrowers are usually offered higher loan-to-value ratios. For example, a healthy 60-year-old may be offered 25 percent of their home’s value, while a 75-year-old may be eligible for 40 percent. Some providers also offer enhanced plans for people with health conditions or lifestyle factors that reduce life expectancy.fe.
Types of lifetime mortgage
Roll-up lifetime mortgage This is the standard product. You take a lump sum or draw funds as needed, and no repayments are required. Interest is added to the loan and compounds over time. The total debt is repaid from the sale of your home at the end of the loan term.
Interest-paying lifetime mortgage You pay the interest monthly to maintain the original loan amount. This option helps preserve more equity but requires you to have sufficient income to meet the payments. If you stop paying, the loan typically reverts to a roll-up model.
Drawdown lifetime mortgage You agree a maximum loan amount but only take money as and when needed. Interest is charged only on the amounts actually withdrawn, which reduces the overall cost. This structure also offers flexibility to meet future needs.
Enhanced lifetime mortgage If you have specific medical conditions, you may be eligible for a higher loan amount or lower interest rate. Health assessments vary by provider and typically include questions about conditions such as heart disease, cancer, diabetes, or a history of smoking.
Voluntary repayment plans Many products allow you to repay up to 10 percent of the original loan each year without penalty. This may be interest, capital, or both. These repayments are optional and flexible, and can reduce the final debt considerably.
Inheritance protection features Some plans allow you to ring-fence a percentage of your home’s value as a guaranteed inheritance. This reduces the amount you can borrow but ensures that part of your estate remains untouched.
The role of the Equity Release Council
The Equity Release Council is a voluntary body that sets additional consumer protection standards beyond the legal requirements of the FCA. Most UK lenders and advisers are members.
Consumer Protections
Products that meet its standards must include:
- The right to remain in your home for life, provided you comply with the loan terms
- A no negative equity guarantee
- Portable products that allow you to move house, if the new property is acceptable to the lender
- Clear disclosure of all terms, charges, and conditions
- Mandatory independent legal advice for all applicants
Choosing a product that complies with Equity Release Council standards ensures you benefit from these safeguards.
Moving home with a lifetime mortgage
Most lifetime mortgages allow you to move house, but the new property must be acceptable to your lender. If the value of the new home is lower, you may be required to repay part of the loan. If the lender does not approve the property, and you wish to repay the loan early, you may face early repayment charges unless your plan includes downsizing protection.
Some plans allow repayment without penalty after a qualifying event, such as moving to a smaller property or the death of a joint borrower, once a minimum period has passed (typically five years).
Effect on inheritance
Taking out a lifetime mortgage reduces the value of your estate. The final impact depends on the size of the initial loan, the interest rate, how long the interest accumulates, and whether any repayments are made.
Implications for care funding
Equity release can affect your ability to qualify for local authority care funding. If you remain in your home, its value is usually disregarded in means testing. However, if you release equity and retain the funds as cash or investments, those assets are counted.
Deprivation of Assets
In England, if your total capital exceeds £23,250, you must fund your own care. Below that threshold, you may be eligible for partial or full support. Releasing equity may raise your capital above this limit and disqualify you from funding.
If the local authority believes you released equity to avoid care costs, it may apply deprivation of assets rules and treat the money as still part of your capital.
Impact on means-tested benefits
Funds released from your home are not treated as income, but as capital. However, if the money remains unspent, it may affect entitlement to means-tested benefits such as Pension Credit, Council Tax Support, or Universal Credit.
How Funds Can Affect Benefits
For example, savings above £10,000 reduce Pension Credit by £1 per week for every £500 of additional capital. A £25,000 lump sum may reduce entitlement by £30 per week. Even small drawdowns can affect eligibility if the money is not used immediately.
A full benefits assessment should be carried out before proceeding. Some borrowers choose drawdown facilities instead of lump sums to minimise the impact on benefits.
Tax treatment
The money you release is tax-free. It is not treated as income and does not affect your income tax position. However, if the funds are used to generate returns, for example, through investments, those returns may be taxable.
Inheritance Tax on Gifts
Gifts made from released funds may fall within inheritance tax rules. If you die within seven years of making a gift over £3,000, it may be added back into your estate. Taper relief applies after three years, reducing the potential tax liability over time.
Frequently asked questions
Can I stay in my home for life?
Yes, absolutely. A key protection of a lifetime mortgage is your right to live in your home for the rest of your life, provided you meet the terms of the loan. This guarantee is a standard for products adhering to Equity Release Council standards.
What if I want to move house?
Most lifetime mortgages are portable, meaning you can usually transfer the loan to a new property. This is subject to the new home meeting your lender’s criteria. If the new property isn’t suitable or is less valuable, you might need to repay part of the loan.
Can I make early repayments or repay the loan in full?
Yes, you can. While there are typically early repayment charges, many plans offer flexibility for partial or full repayment without penalty under specific conditions, like moving or the death of a joint borrower. Check your specific plan for details.
Could a lifetime mortgage affect my benefits?
Potentially. The money you release is treated as capital, not income. If your total savings exceed certain thresholds, it could impact your eligibility for means-tested benefits like Pension Credit or Council Tax Support. It’s crucial to get a full benefits assessment before proceeding.
Do I need advice before taking out a lifetime mortgage?
Yes, it’s a requirement. You must receive personalised advice from a qualified financial adviser, as well as independent legal advice from a solicitor, before finalising a lifetime mortgage. This ensures you fully understand all aspects of the product.
