What is an equity release lifetime mortgage?

Property prices have soared since the 1990s, leading many of us to take on large mortgages. And because we’ve used a significant percentage of our income to pay them off, the money we might have otherwise used to build a healthy retirement pot has been diverted into a property instead.

During this time your property asset may have grown significantly in value – but that money is usually inaccessible unless you downsize. For those who don’t want to move, but need to find additional funds in retirement, lifetime mortgages might be an option.

A lifetime mortgage is one of the most common forms of equity release, with the other being a home reversion plan. Both could be used to provide you with a retirement income or pay towards care home costs if you need the additional money.

A home reversion plan is when you sell all or part of your home for a sum less than market value. In exchange, you’ll receive a lump sum or regular guaranteed payments, and you can stay living in your home rent-free until you die.

In contrast, a lifetime mortgage is like taking out a loan at an agreed interest rate that gives you a lump sum or regular payments.

To find out more about equity release, see The Pros and Cons of Equity Release

A lifetime mortgage allows you to stay living in your own home without having to make regular mortgage payments. The mortgage loan and the interest accrued are repaid when the property is sold, usually when you die or move into long-term care.

There are two main types of lifetime mortgages: an interest roll-up mortgage and an interest-paying mortgage.

Interest roll-up mortgage

With an interest roll-up mortgage, interest will continue to accrue on the amount you borrow, which is added to the loan and paid in full when the house is sold.

One thing to remember is that the interest on the original loan will build up, which means that you’ll be paying interest on the interest itself – a process known as ‘compounding’. This compounding makes roll-up mortgages more expensive than a standard mortgage, and it’s important to understand the implications. However, many roll-up mortgages are a fixed rate for life, so you’ll know from the outset how much that debt might grow, over a given timeframe.

There is a chance that you could end up owing more than the property is worth if house prices don’t rise (or worse, fall). Many providers offer a ‘no-negative-equity-guarantee’ to ensure you never end up owing more than the value of your property when it’s sold.

Interest-paying mortgage

To avoid the compound effect, you can take out an interest-paying mortgage. You’ll still receive a lump sum or regular income payments, but instead of the interest being added to the loan, you’ll make regular payments to pay it off. This means the amount left on the outstanding loan will be much smaller when the property is sold and you will pay far less in the long term.

However, because you will still need to pay those regular payments to cover the interest, you may decide that this approach largely defeats the purpose of using equity release in the first place.

You should always seek advice from an independent financial adviser before taking out a lifetime mortgage or any other form of equity release. They will crunch the numbers to consider all possible options for you to ensure your interests are protected.