In the world of later life finance, things have changed dramatically over recent years. Gone are the days of restrictive equity release products that once dominated the market and were of dubious quality. “Today, lifetime mortgages offer flexibility, security and peace of mind for homeowners aged 55 and over.” says Andy Shaw, Director of Later Life Lending at SPF Private Clients. It’s an evolving landscape and there are some common misconceptions to dispel.
What is a lifetime mortgage?
“I think the best frame of reference for this is to compare the lifetime mortgage with a traditional interest-only mortgage, because ultimately that’s what it is,” explains Andy. “It is a mortgage; the same as one would get from a high street bank or building society where the funds are secured via a first legal charge against the property. The homeowner retains full ownership of their property.”
One key difference is that with a lifetime mortgage, there is no fixed term. The mortgage will run until the borrower either passes away or moves into permanent residential care. And in the event of it being joint borrowers, it’s the second one of them passing away or moving into care that is the end of the mortgage.
What can you use a lifetime mortgage for?
“There are several reasons why people take out lifetime mortgages,” says Andy. Repaying interest-only mortgages is a common motivation, particularly for those facing the end of their mortgage term or experiencing payment shock when remortgaging. “People who are coming up to remortgage are now finding they’re looking at rates much higher than they’ve enjoyed previously,” says Andy. Gifting to family members represents another major use case. “It’s part of the bank of mum and dad,” says Andy. “Those gifts can often be for a deposit for the children’s own house purchase, and when properly structured, these arrangements can also offer potential inheritance tax advantages. Home improvements and lifestyle expenditure form another category. This includes property modifications or renovations, topping up retirement income, or funding discretionary spending such as holidays, a new car, or a holiday home. Using a lifetime mortgage to fund care needs is increasingly common among elderly homeowners. For example, the funds may be used to allow an individual to receive care and support in the comfort and privacy of their own home, rather than moving into a residential care setting. Lastly, supporting property purchases is the often-overlooked use of lifetime mortgages. Beyond just remortgaging existing properties, these products can help bridge gaps when downsizing or relocating. “They can help facilitate a purchase as well as just remortgages, which is particularly useful when moving to areas where property values are higher, such as relocating to be closer to family.” says Andy.
So what are the key benefits of a lifetime mortgage?
There are several advantages that make lifetime mortgages attractive:
- Fixed-for-life interest rates: “The rate of interest will never change. Whereas with a typical mortgage, you might have a two, three or five-year fixed rate, after which time you need to remortgage and you’re at the mercy of what rates are at that unknown future point, with a lifetime mortgage the interest rate will remain the same until it ends. This does of course mean that you will not usually benefit should interest rates fall.”
- Lifelong security: “Because the mortgage is for life, you take away that cliff-edge end date where the lender is expecting the mortgage to be repaid.”
- Flexible payment options: “There is no obligation to pay the mortgage interest, which provides great flexibility but borrowers must be mindful that if you choose not to make payments then those interest costs get added to the loan amount, which increases on a compounding basis.”
- Payment flexibility: “All lifetime mortgages now allow the borrower to make voluntary payments of interest. And those payments can be full or partial payments of interest, made regularly or on an ad hoc basis.”
- No negative equity guarantee: “If at the natural end of the mortgage, the value of the debt exceeds the value of the property, the lender is restricted to only recouping 100% of the property’s value and they have to write off the rest, so your descendants will not be left with excess debt to pay.”
Debunking the myths around lifetime mortgages
“Equity release schemes of old had a bad reputation, and some of these misconceptions still exist around lifetime mortgages, so they need debunking,” says Andy. “With a lifetime mortgage it’s not true that you give up ownership of your home, it’s not true that you can’t make payments of interest, and it’s not true that once you’ve taken out a lifetime mortgage you’re stuck in that property for life,” says Andy. While lifetime mortgages do offer many benefits, Andy acknowledges there are trade-offs to consider: “The rates on a lifetime mortgage will be higher than a typical interest-only mortgage because you are paying a premium for that certainty of cost, the security of tenure and the flexibility of payments.”
There is an expectation from lenders that the lifetime mortgage will be in place for a reasonable period of time, and so they charge early repayment charges for full voluntary early repayment in the early years. “‘Voluntary’ is the key word here,” points out Andy. “There are no Early Repayment Charges (a charge levied by the mortgage lender on the customer in the event that the amount of the loan is repaid in full or in part before a date or event specified in the contract) at the natural end of the mortgage, for example if the borrower was to die or move into a care facility.’
What consumer protections are in place for lifetime mortgages?
Consumer protection is a cornerstone of today’s lifetime mortgage market, with multiple layers of safeguards in place to protect borrowers. The regulatory framework has evolved significantly in recent years, helping transform what Andy describes as a once ‘Wild West’ sector into a well-regulated financial service. “Not only are we talking about a regulated mortgage contract that is regulated by the Financial Conduct Authority,” Andy explains, “But we also have our trade body, the Equity Release Council, who set certain product and service standards to which all member firms must adhere.”
These industry standards ensure key protections such as mortgage portability and the right to make interest payments. The regulatory oversight extends beyond just the products themselves to the advice process that surrounds them. Andy highlights that the Equity Release Council requires that borrowers take independent legal advice on a face-to-face basis for these products to make sure that there are checks and balances in place around client understanding and capacity. This independent legal advice serves an important function in protecting vulnerable clients, particularly when funds are being released to give to family members. The process helps ensure that any gifting is truly voluntary and part of a considered financial plan, rather than the result of pressure from third parties.
Obtaining proper financial advice is critical when considering a lifetime mortgage. At SPF, the approach focuses on exploring all available options rather than simply selling a particular product. “It’s an advice process, it’s not a sales piece,” says Andy. Advisers work to understand each client’s unique circumstances and consider various solutions, whether that is an alternative type of mortgage, such as typical interest-only mortgages or retirement interest-only mortgages, or non-mortgage options. This might include evaluating whether downsizing could be more advantageous than releasing equity from an existing property, or whether other assets might be more efficiently deployed to meet financial needs.
The face-to-face consultation process is designed to foster trust and ensure thorough understanding. As Andy puts it, “We like our clients to see the whites of our eyes. We prefer to meet in person, have a cup of tea and a chat, talk things through properly and fully understand the borrower’s position.” Family involvement is also encouraged when appropriate. “We always offer and indeed encourage borrowers, where appropriate, to involve their family.” says Andy, recognising that decisions about equity release often impact multiple generations. This inclusive approach helps ensure that everyone potentially affected by the arrangement understands its implications.
What are the eligibility criteria for lifetime mortgages?
Rather than focusing on income assessments, lifetime mortgages are based primarily on age and property ownership. “These are available for borrowers aged 55 or above.” Andy explains, with the loan secured against the borrower’s primary main residence.
Property ownership structure is also important. The property must be owned in the borrower’s personal name, rather than through a company or trust arrangement. This requirement relates to the fundamental nature of the product, where repayment becomes due upon the borrower’s death or move into care– events that wouldn’t apply to a corporate entity or trust.
Unlike traditional mortgages, lifetime mortgage approvals don’t depend on income-based affordability assessments. Instead, lenders primarily consider the borrower’s age (as an indicator of likely loan duration) and the property’s value and future salability, since these factors directly impact how the loan will ultimately be repaid.
The lifetime mortgage landscape has evolved significantly, offering flexible and secure options for later life financial planning. With fixed-for-life interest rates, payment flexibility, and strong consumer protections, these products provide solutions tailored to a variety of needs – from supporting family members to funding home improvements or care needs. As with any significant financial decision, seeking professional advice is essential to determine if a lifetime mortgage is the right choice for your circumstances.
Contact us if you would like to discuss lifetime mortgages with our expert advisers at SPF Private Clients.
