What is a lifetime mortgage?
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.
Most lifetime mortgages have a fixed rate of interest. Some providers offer variable-rate lifetime mortgages, but these offer less certainty.
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.
Which? Mortgage Advisers can explain your options, including remortgaging to a better deal and retirement interest-only (RIO) mortgages.
Unfortunately they are unable to advise on equity release policies.
How do I take out a lifetime mortgage?
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).
The Which? Money Helpline has a team of qualified experts that can help answer your questions on equity release. Sign up to a £1 trial with Which? and speak to one of our experts.
What are the different types of lifetime mortgage?
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.
Help for funding later life care
On the Which? Later Life Care website we provide detailed advice about all aspects of paying for care in later life. You can also use our simple care costs calculator, which tells you how much care might cost and your eligibility for financial support.
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:
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.
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.
What are the alternatives to lifetime mortgages?
In recent years, a new set of mortgage options for older borrowers have been launched, allowing people to borrow against their property in later life but retaining the ability to pay down some of the debt.
Retirement interest-only mortgages allow you to take out a mortgage in retirement, and many only require repayment on death, when the homeowner goes into care or the property is sold.
You are only required to pay off the interest on the loan each month, not the capital value of the loan. If you can afford the repayments, this means that only the loan is repaid when the property is sold, so more could be left behind for your heirs.
Find out more in our guide to retirement interest-only mortgages explained.