How to release equity with a lifetime mortgage
Have you ever thought about releasing equity from your home through a lifetime mortgage? It can often be a valid option for elderly homeowners who have paid off the majority of their mortgage, but might need additional funds for a personal project or large purchase.
It isn’t the most ideal choice for everyone, but it still provides another option for borrowing money that homeowners can take advantage of if necessary. As an equivalent to a secured loan, it can provide a lifeline of funds if you’re struggling financially, or even help out family members who are struggling to save enough for a house deposit themselves.
If you’re unsure about what equity is, never mind the process of releasing it, our short guide on lifetime mortgages might be an enlightening place to start on the path to a lifetime mortgage.
What is equity release?
Equity release is a term used for converting a smaller amount of the total value of your property into a lump sum amount that you can spend at your discretion.
Phrases such as ‘unlocking the value in your property’ are often used to summarise releasing equity, but in reality it is receiving back some of the money you’ve already paid off your mortgage, while charging you interest for the privilege.
Very plainly it can be like taking a backwards step in your mortgage, but for the purposes of receiving a large amount of cash to use for whatever you wish. This can be particularly useful in a number of circumstances, including:
- If you’re struggling financially – many homeowners who are struggling to make ends meet elsewhere can use an equity release as a cash injection to assist with a lack of available funds
- Want to pay off other debts – if you already have a number of debts outstanding and would like to pay them all off at once, withdrawing equity from your property can help in paying this all off at once
- Make a home improvement – if you’re thinking about making a costly home improvement you can also use your released equity to fund this expense
- Make an expensive purchase – if you have been thinking of making a large purchase such as a new car, a caravan or even a holiday home, and would like to do it sooner rather than later, releasing equity can help
- Gift the amount to a family member – if you have a son or daughter who are struggling to save up for a deposit themselves, you can gift them the amount by releasing equity from your own home
How does a lifetime mortgage work?
The most common way that homeowners choose to release equity from their house is through a lifetime mortgage. This is different than a regular mortgage, as it allows you to have the option of repaying the loan amount when you eventually sell the home, whether it’s after your death or if you move into a nursing home in old age.
This means you can avoid having to make monthly repayments at all as the additional amount, alongside the accumulated interest, goes to the lender once the property is sold.
Here are some additional facts about lifetime mortgages:
- The minimum age is normally 55
- You can usually borrow up to 60% of the value of your home
- There can be a ‘no negative equity’ clause which means even if the interest piles up, it can’t go above the total value of the property
What lifetime mortgage is best for me?
When deciding on which lifetime mortgage deal is right for you, you will usually have the choice between three options:
- Interest roll-up – this means that the interest is rolled-up into the loan amount and only paid back once the property is being sold. That means you won’t have any monthly repayments, but depending on how long you’ve borrowed for, it can end up being very costly when you sell the property
- Interest-paying – if you would prefer to pay back the interest as you go along, you can also choose an interest-paying lifetime mortgage, which ensures that only the loan amount is paid back when your property is sold, as the interest will already have been paid off
- Drawdown – an increasingly popular choice, a drawdown lifetime mortgage allows you to flexibly withdraw a smaller amount of funds when required, paying a lesser amount of interest on top. Withdrawing multiple smaller amounts rather than one big sum means paying back less interest overall
Why a lifetime mortgage might be a bad idea
The idea of receiving a large lump sum and not having to make any repayments is an attractive short term idea, but in the long term this can take a large chunk out of the amount you get for selling the house, or even wipe it out completely. The following additional reasons might make getting a lifetime mortgage a less-attractive proposition:
- The interest can stack up quickly – if you have opted for an interest roll-up lifetime mortgage, you run the risk of accumulating a large amount of interest on top of your loan amount, especially if you take the loan out over a long period of time
- Reduces or wipes out any inheritance – since the interest can stack up and the eventual payment comes out of the sale of the property, you are effectively reducing the amount of inheritance that can be claimed by your children
- Most expensive way to borrow – compared to other ways of borrowing, this can by far be one of the most expensive, resulting in a massive debt that despite not being paid with your own money, will come out of an eventual house sale
- Passing on the debt – for any reason if there are any issues with the eventual house sale, the final amount will still need to be paid to the bank by whoever inherits the property
If you think releasing equity using a lifetime mortgage might not be for you, but you're more inclined to remortgage your home, start off your search using our moneymatcher tool here.
Written by Robert Bester
Updated on 14th October 2019
Published on 4th March 2019