How a lifetime mortgage works, and the standards that sit behind it

For many households, the home is worth far more than the pension. Equity release is a way of using some of that value without moving out. It comes in two main forms. With a lifetime mortgage you borrow against the home and keep owning it. With a home reversion plan you sell part or all of the home to a provider in return for a lump sum or regular payments, and keep the right to live there. This article covers lifetime mortgages.

This is a neutral explainer. Equity release suits some people and not others, and the decision has long consequences for the borrower and for anyone expecting to inherit the home.

How a lifetime mortgage works

The Financial Ombudsman Service, which handles complaints about equity release, describes it like this: lifetime mortgages are generally only available if you are 55 or over. You borrow a percentage of the value of your home, with interest added over the years. You usually do not have to make repayments while you remain in your home. The loan is paid back after you have moved out, for example into a care home, or after you have died.

Money can be taken as one lump sum or as a smaller initial amount with a “drawdown facility” to take more later, so that interest is only charged on what has actually been taken. Some plans allow voluntary repayments; others require monthly interest payments in return for a different structure.

Why the debt grows faster over time

When no repayments are made, interest is added to the loan and then interest is charged on that interest. This is compound interest, and it is the single most important thing to understand about a lifetime mortgage. The Ombudsman warns that the amount to be paid back can be much higher than you borrowed, and notes that lenders usually limit borrowing to well below the value of the home for that reason.

Interest compounded once a year for simplicity. Real plans compound monthly or annually at the rate in the offer; the house may rise or fall in value over the same period.

At the example rate the debt roughly doubles in about twelve years. Whether that matters depends on the value of the home at the end, on what the borrower wanted the money for, and on what the family expects.

What the Equity Release Council standards promise

The Equity Release Council is a voluntary trade body. Its members agree to product standards that go beyond the legal minimum. For lifetime mortgages, the Council lists these core standards:

• Fixed or capped interest. The rate must be fixed or, if variable, have a cap, fixed for the life of the loan.
• A home for life. You have the right to live in the property for the rest of your life, or until you move permanently into care, provided it remains your main residence and the terms of the loan are kept.
• The option to move. You can move to a suitable alternative property and transfer the loan, subject to the lender’s criteria at the time.
• No negative equity guarantee. Provided the property is sold for the best price reasonably obtainable and the terms are met, you or your estate will never owe more than the home is worth, after reasonable sale costs.
• Penalty-free repayments. You must be able to make repayments without charges, subject to the lender’s criteria.
• Long-term care. If you move permanently into long-term care, any early repayment charge is waived on receipt of a medical practitioner’s certificate.

The Council also requires every customer to receive independent legal advice from a solicitor, who explains the plan and signs a certificate before it proceeds.

Doing the sums

An illustrative check. A home worth £300,000 with a £60,000 lifetime mortgage at an example 6% fixed rate. After 15 years the debt would be about £144,000. If the home had not risen in value, about £156,000 would remain for the estate, before sale costs. If the home had fallen in value so that the debt exceeded the sale price, the no negative equity guarantee would mean the estate owed no more than the sale proceeds.

Advice, regulation and early repayment

Lifetime mortgages are regulated by the Financial Conduct Authority, and they are sold with advice. The Ombudsman’s list of the questions it considers when a complaint arrives is a useful checklist for anyone thinking about one: was the agreement clearly explained, particularly the early repayment charges? Did the borrower understand how it worked? Was it necessary to raise money this way, or were other options explored properly? Did the borrower plan to move or downsize?

Ending a plan early, other than in the care situations covered by the standards, can bring an early repayment charge that the Ombudsman describes as often significant. That is one reason why people who expect to move within a few years are often better served by another route.

Alternatives worth weighing

• Downsizing to a smaller or cheaper home, which releases money without borrowing.
• A conventional or retirement interest-only mortgage, where interest is paid monthly so the debt does not grow. If you already have a mortgage, our guide to what happens when a fixed rate ends covers the options at renewal.
• Using other savings or pension money first, after looking at the tax effect; see our explainer on drawdown withdrawal rates.
• Help from family, set out clearly in writing.

Who this matters for, and what to check

Lifetime mortgages are aimed at homeowners aged 55 and over with significant equity and limited other resources. Before speaking to an adviser, it helps to know what the money is for and how much is really needed, to talk to the people who might inherit the home, to check how a lump sum could affect any means-tested benefits, and to ask whether the adviser looks at the whole market. Free, impartial guidance on equity release is available from MoneyHelper.

The short version

A lifetime mortgage lets you borrow against your home from 55 without monthly repayments, but the interest compounds and the debt can grow large over a long retirement. Equity Release Council members offer fixed or capped rates, the right to stay in the home for life, the option to move, and a no negative equity guarantee. Independent legal advice is compulsory under the Council’s standards. Compare it calmly with downsizing and other options, and involve the family early.