How does a lifetime mortgage work ?

Posted by admin On December 23rd 2020

A lender will usually be prepared to lend anything up to a maximum of 55% of the property value for a lifetime mortgage, depending on the borrower’s age at the time. Most lifetime mortgages are on a fixed-rate (the standard lifetime rate) and take into account the fact that the term of the loan is completely unknown.

No regular payments of capital or of interest are made. Instead, the interest is added to the loan (it is ‘rolled up’). When the borrower passes away or moves house, the property is sold on, and the mortgage loan plus rolled-up interest is repaid to that lender. If there are any proceeds remaining once the loan has been repaid, the borrower, or their estate, receives that remaining balance. If the property is owned jointly, the mortgage continues until the second person dies or vacates the property.

A lifetime mortgage can also be arranged on a ‘drawdown’ basis. The lender agrees a maximum limit that they will lend, and the borrower can borrow an initial minimum loan then subsequently draw down further lump sums as they wish, subject to a minimum withdrawal, most typically £2,000 to £5,000. Interest is charged on the amount outstanding in the same way, but this time is rolled over rather than paid each month.

Most lenders also provide a ‘no-negative-equity’ promise, which means that the borrower cannot owe more than the value of the property when the loan is due to be repaid.

The benefit of this type of loan over a standard lifetime mortgage is that interest only accrues on the amount actually lent, so the borrower has some degree of control, and the debt will not increase as rapidly. It will allow the borrower to provide an annual ‘income’ while maintaining control over the rate at which the debt builds up.