What is a lifetime mortgage and how does it work?

Full answer

A lifetime mortgage is a form of equity release that lets older homeowners unlock tax-free cash from their property without selling it or moving out. You retain full ownership of your home, unlike a home reversion plan where you sell a share. How it works: you borrow a lump sum (or a drawdown facility you take in stages) secured against the property. With most plans there are no required monthly payments - instead the interest is added to the loan and compounds over time. Because nothing is paid back during your lifetime, the debt can grow substantially: this is the key risk, as compounding interest erodes the equity left for your estate. The loan plus accrued interest is repaid when the last borrower dies or moves permanently into long-term care, usually from selling the property. Who it affects: typically homeowners aged 55 and over who want to supplement retirement income, fund home improvements, or help family, but who are asset-rich and cash-poor. The amount you can borrow depends mainly on your age and your property's value - older borrowers can usually release a larger percentage. Key protections and trade-offs: plans meeting Equity Release Council standards include a no-negative-equity guarantee, so your estate never owes more than the property sells for. Many modern plans now let you make optional interest or capital payments to slow or stop the roll-up. Releasing equity reduces what you can leave as inheritance and may affect means-tested benefits. Because the cash is tax-free borrowing rather than income, it does not itself trigger Income Tax. Regulated advice is mandatory before taking a lifetime mortgage. Consider the long-term cost of compounding interest, and use a compound-interest or mortgage calculator to see how a rolled-up balance can grow over 15 to 25 years before you decide.

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