What is a life time mortgage?

A lifetime mortgage has some similarity with a conventional mortgage

  • It is secured on the residential property.
  • The collateral usually takes the form of a first charge.
  • The mortgage deed sets out the rights of the lender and the obligation of the borrower.
  • The administration and legal processes required to set up the loan are similar.

However, there are many crucial differences

  • There is no specific term of years in the mortgage contract.
  • The interest rate payable and charges incurred may be very different to a conventional mortgage.
  • The risk factors to both the applicant and the lender are quite distinctive.
  • Some schemes are not mortgages at all - for example, reversion schemes involve selling a stake in the property and not raising funds against it.

More on lifetime mortgages

These are interest-only mortgages, with a rate of interest which can be variable, fixed or capped, or in the case of a shared appreciation mortgage the rate of interest is zero with no repayments to make, just an agreement for the lender to take a fixed share of the increased value of the property. All of the schemes have no fixed repayment period.

The maximum amount of the loan is determined by the age of the homeowner, or in the case of joint homeowners the youngest age.

Interest rolls up on the mortgage until the capital is repaid, on death, on moving into Long Term Care, or on the sale of the property. Then, capital and interest are repaid and the balance of the value of the home goes to the estate.

Over an extended loan period the accumulated interest could exceed the value of the home, particularly if house prices stagnate or fall. However, lenders now offer a "no negative equity" guarantee, which ensures that the homeowner will never owe more than the value of their property. The cost of providing this guarantee is the reason why a higher rate of interest is charged on lifetime mortgages than on other types of mortgage (typically 2% to 3% higher).

On completion of a lifetime mortgage, the home owner can have the option of a lump sum or a regular income. Some lenders allow the loan to be drawn down in slices, so that interest is only paid on what has been drawn. This also provides protection against the risk to the homeowner of spending capital on buying an annuity and then dying prematurely and losing the capital invested. This arrangement also avoids Income Tax, because each payment received is an advance of capital.

Unlike reversion schemes, the homeowner benefits from any increase in house prices. Homeowners rely on increases in value of their property to offset the rolled-up interest on their loans. However, the amount which will be owed by the homeowner's estate to the provider cannot be predicted, because it depends on a number of factors, including the length of time the homeowner lives, the level of interest rates and the degree of house price inflation. The Consumers' Association has calculated that homeowners could end up owing more than six times the amount they borrow if they live a long time. So, clients with a family history of longevity might be better suited by reversion schemes. Conversely, if the homeowner dies only one month after taking out a lifetime mortgage, then only one month's interest plus the amount of the loan is payable.

It has been calculated that at current interest rates the mortgage debt under an Equity Release scheme will double every 10 years. Nevertheless, subject to age factors and interest rates, if house prices increase by more than 2.5% per annum the estate of a homeowner is likely to receive more from a lifetime mortgage arrangement than from a reversion scheme.