You're retired - working on, benefits, equity release
By Paul Davies
Article 2 of 4
A lifetime mortgage is a long-term loan secured against your home. It's repaid when you die or go into long-term care.
Lifetime mortgages: how they work
Most lifetime mortgages have a fixed rate of interest. Some providers (such as Scottish Building Society) offer variable-rate lifetime mortgages, but these offer less certainty.
Unlike conventional mortgages, where interest is charged on an amount that decreases with time, interest on lifetime mortgages is charged on an increasing sum, so your debt can grow quickly. This is because you don't make any repayments, so the interest on the loan is therefore added to your debt on a continual basis.
You'll never have to repay more than the value of the property, however, as members of the Equity Release Council, a trade body for providers of the schemes, have guaranteed that people who take out the product won't ever find themselves in this scenario.
Lifetime mortgages: lending criteria
Equity release providers have some strict lending criteria, such as a minimum age, which is normally 55 or 60. The percentage of your property you can borrow against depends on your age; the older you are, the more you can borrow. At 65, you can normally borrow 25% to 30%, for example. If you're older, you can borrow as much as 50%.
There are also minimum loan amounts – which can range from £10,000 to £45,000. Your home will probably have to meet a minimum value specification too (normally £70,000 to £100,000).
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Lifetime mortgages: the different types
The basic form of lifetime mortgage is a lump-sum loan, where the interest payable is 'rolled up' over the full term. There's nothing to pay for the rest of your life, but interest is compounded year on year until you die (or move into a residential care home). For most lump-sum deals, interest rates are fixed at the outset.
Some firms offer a flexible lifetime mortgage, where you take a smaller amount at the outset, then draw down further borrowings as required. Since you pay interest only on the money you’ve taken, the overall cost can be considerably lower.
Another way to reduce the cost is to allow borrowers to pay off some, or all, of the interest during the life of the loan. Hodge Lifetime, Stonehaven and More2Life all offer this option.
Enhanced lifetime mortgages
Some providers offer more money to those with lower-than-average life expectancies. Aviva, More2Life and Just Retirement all offer these mortgages.
Lifetime mortgages: drawbacks to consider
While equity release offers the chance to draw on the value of your home, there are several drawbacks to consider:
- Cost: This can be very high. In some cases, it may drain almost all the value of your home, with little left over for your heirs.
- Early repayment penalties: Most equity release schemes don’t allow you to pay off the loan and are based on interest building up over the full term. If you decide to end the deal prematurely, providers demand an early-repayment charge. Rates are often based on prevailing government bond (gilt) rates and lack transparency.
- Problems moving: Although loans arranged with members of providers’ trade body the Equity Release Council (ERC) are 'portable' – meaning that you can move from one property to another – moving can be difficult if the new property is more expensive than the equity remaining in your old one. Some properties, such as sheltered housing, are not always acceptable to lenders, as they can prove hard to sell.
- Loss of means-tested benefits: Drawing extra money from housing equity may mean you lose eligibility for pension credit and council tax benefit.
- Last updated: June 2016
- Updated by: Ian Robinson