Lifetime Mortgages

All lifetime mortgages are offered on an interest roll-up basis, which means that the interest charged on the loan isn’t paid monthly month but added to the outstanding loan amount. The interest then compounds; it’s charged on this new, bigger loan amount each month. The loan amount increases at an almost exponential rate. This can sound quite intimidating, but the no negative equity guarantee means you’ll never pay more than your property is worth.

In fact, the no negative equity guarantee has rarely been needed. Lenders expect there to be some equity left over for inheritance after the sale of the property. They’d actually lose money if the loan amount increased to more than the property was worth when it was sold, so they avoid lending you too much in the first place by limiting the percentage you can borrow. They take account of your age, the amount of interest which will be added to the mortgage during the rest of your expected life and the increase they expect in the value of the property over time.

It’s important to remember that although the amount you’ll owe will increase steadily, so may the value of your property. Therefore, it’s unlikely they’ll be no equity left over for inheritance.

Most lifetime mortgages allow you to make payments of up to 10% per year with no ERCs (early repayment charges). Any payments you choose to make will reduce the outstanding loan amount and consequently the interest that’ll be charged. However, there can be hefty ERCs if you repay more than 10% per year.

To ensure you’re not surprised by these charges, speak to your broker about exactly what you can and can’t repay.

A few lenders offer the option of an interest-only lifetime mortgage which requires you pay some or all of the interest, at least for an initial period. This reduces - and can halt - the interest from rolling-up and hence the loan from increasing. But, as monthly payments are required, the borrower must be able to prove affordability to the lender.

You can ring-fence some of the value of your property as an inheritance for your family. This means the lender can’t touch it, even if the loan amount exceeds the remaining equity value. However, to account for this portion, the lender would reduce the total amount you could borrow and/or increase the interest rate.

With a drawdown lifetime mortgage, the lender calculates the total amount of cash they could let you borrow, but you don’t receive it all in one go. Instead, you’re given an initial, smaller lump sum with the option to borrow more via a drawdown facility in the future.

Interest is only ever charged on the amount you’ve received, not the total amount you could borrow. As a result, less interest is charged over time. The loan amount doesn’t increase as quickly so you end up owing less by the time the property’s sold, leaving more for inheritance. The interest rate on each drawdown will normally be set at the time of the drawdown.

A variation of the drawdown lifetime mortgage that some people find more convenient is what’s referred to as an "income product". When you choose this option, you have a regular drawdown - e.g. once a year - of a set amount. The initial maximum lump sum available to you will be smaller than if you choose one of the other options.

By avoiding borrowing a larger initial lump sum, those who may be entitled to social security benefits will be able to keep their savings balance below the relevant threshold and, as interest is only charged on the outstanding loan amount, less interest will be charged than if a larger amount was taken at the outset.

What’s more, the amount of the regular payment is classed as capital - not income - so it’s not taxable, making it a useful way of boosting retirement income.

A few lenders sometimes offer a variable rate lifetime mortgage, where the rate will typically rise and fall in line with the Bank of England’s base rate. However, these mortgages don’t have the same protections that come with fixed rates and the main reason to choose a variable rate is to avoid ERCs.

A home reversion scheme isn’t a mortgage; it’s where you sell all or some of the equity in your property to an investor - e.g. 30%, 50%, 100%, etc. The investor owns that proportion of the equity in your home until it’s sold and they get their money back.

You receive a lump sum for the percentage you sell. The amount you receive is calculated at a large discount to the current value of the property. This discount reduces as you get older, because there’ll likely to be less time before the investor can realise their asset.

The investor’s buying a percentage of equity rather than giving you a loan, so they’re entitled to that percentage of the sale price and may expect that the property will increase in value by the time it’s sold.

What’s more, as you’re selling equity in the property, the investor becomes the owner or a joint owner, depending on whether you sell 100% of the equity or just a portion. Even if they become the sole owner of the property, you have the right to live in it until you die or enter long term care with no prospects of returning to the residence.