How does it work?

With this plan, you sell part of or your entire home to a reversion plan company in exchange for a tax-free cash lump sum and a guaranteed lifetime lease with no monthly repayments to meet.
You can stay in your home either rent-free or by paying a nominal rent for as long as you choose and you can guarantee an inheritance to your beneficiaries. Both you and the reversion scheme company share in any increase in your property's value, provided you have not exchanged 100% of its value.

How does it work?

A lifetime mortgage is a form of equity release scheme whereby a loan is secured against your property, providing you with a tax-free cash lump sum or a regular income to spend as you wish.

Although there are Lifetime mortgages where you pay the interest (and possible capital) as it accrues, commonly Lifetime mortgages are arranged on a roll-up basis, meaning that borrowers will not be required to make payments during the term of the loan, instead the lender adds the interest that accrues to the original loan amount. ‘Roll-up plans’ can be very useful but borrowers must remember that the amount of the mortgage debt can increase quickly due to ‘compounding’ – i.e. you will be charged interest on the original loan and any interest that is added to the loan account.

Interest is added to the lifetime mortgage loan throughout your lifetime, accruing at a fixed or variable rate. The loan plus interest is eventually paid back when the home is sold which could be when you move into long-term care, or when you and your partner die. Subject to your age you can typically release between 18-50% of the value of your home with a lifetime mortgage.

Types of Equity Release Schemes

There are two  equity release schemes available on the market offered by reputable equity release providers, and they fall into two main categories:

1. Lifetime Mortgages
2. Home Reversion Plans

Each type of equity release scheme facilitates a different method of releasing the equity in your home, and there are various other useful features available to create the ideal equity release scheme for you, including:

Protected Equity

Many equity release schemes come with a no negative equity guarantee, and in some cases, there are plans which also enable you to protect a fixed share of the value of your home. For example, if you protected a 30% share in your home, you have a guarantee that a minimum of 30% of your property value is protected for you in later life or as an inheritance for your beneficiaries.

Impaired Life

Some providers will allow you to release more capital from the equity release scheme if you suffer from one of a list of health conditions.

For those who want to build their own home, a conventional residential mortgage is not an option. Instead, the self-builder would need to apply for a self-build mortgage. Not every lender is active in the self-build mortgage market and those that are, tend to charge a higher rate of interest for self-build mortgages. Self-build mortgages involve regular site inspections, and additional administrative tasks and are deemed to carry more risk for the lender than conventional mortgages do. Also, the self-build mortgage application can take longer to process than average — five or six months is not unusual. 

Key requirements

The lender will want to see detailed plans for the property, an accurate build cost projection, and building regulations approval and would expect, at the very least, outline planning permission to have been granted. Rather than the borrower taking on the build, lenders are likely to require a professional builder or a qualified project manager to be appointed. 

Buy-to-let Mortgages

Buy-to-let (BTL) mortgages are specifically for individuals who wish to buy residential property which they intend to rent to tenants. Although a BTL mortgage is similar in a number of respects to a standard residential mortgage, there are some significant differences between the two.

Eligibility and lending criteria

Most banks and building societies (and some other financial institutions) offer BTL mortgages, but terms, conditions, and costs vary enormously. 

Some mortgage providers will not lend to individuals who are under 25 years of age or earn less than £25,000 a year. Lenders may impose an ‘upper’ age limit on the term of the mortgage by insisting that the mortgage is repaid in full before the borrower reaches a certain age — 70 is not untypical. 

A Second Charge mortgage is, as the name suggests, a separate and additional mortgage to the homeowner’s main (or first) mortgage.

Second charge mortgages (sometimes known as ‘Homeowner Loans’) are loans that are secured against the borrower’s residential property, and as such, are available only to homeowners. In common with remortgages, second charge mortgages are sometimes used by homeowners to raise money.

When considering a second (‘further’) advance, the lender will take into account the value of the borrower’s home, less any mortgage owed on it. The difference between the two amounts is known as ‘equity’ and provides the lender with security against the loan. If for example, the home is estimated to be worth £300,000 and the amount remaining to be paid on the mortgage is £100,000, the equity is £200,000. In addition to the amount of equity that’s available, the lender will consider the borrower’s ability to service both mortgages if interest rates were to rise.

In return for not receiving any interest on their savings, the homeowner can reduce their monthly payments or shorten the mortgage term, an arrangement known as ‘offsetting’. An Offset mortgage is only available where both the mortgage account and the savings account/accounts are with the same provider.

For example, on a £200,000 mortgage, if the homeowner offsets £20,000 of their savings against their mortgage, he or she would pay interest on the outstanding balance — £180,000. As the rates of interest charged on mortgages are usually higher than those paid on savings accounts, offsetting can be more financially advantageous to the borrower.

Furthermore, homeowners can use an Offset Mortgage to either shorten the term of their mortgage or reduce the monthly repayments. Borrowers who wish to shorten the term of their mortgage would base their monthly repayment on the full £200,000 mortgage and pay more each month than the lender requires them to. Or the homeowner could base their monthly repayment on the lower (offset) figure of £180,000, which would reduce the monthly repayment but the term of the mortgage would remain the same.

A cashback mortgage is an arrangement where the lender pays or rebates to the borrower a sum of money (or some other form of financial benefit/incentive) either on completion of the mortgage or at a later stage. The borrower can use the cashback to help pay some of their property purchase costs such as legal and surveying costs, stamp duty, removals charges, or home improvements and repairs.

The amount of cashback the borrower will receive depends on the lender’s requirements. Sometimes it is calculated as a percentage of the total mortgage advance and will therefore vary in value, or it may be a fixed and non-negotiable amount. Some mortgage providers insist that the borrower already holds (or opens) a current account with them before they qualify for cashback.

Cashback mortgages are usually associated with standard variable rate or tracker mortgages, although the rate of interest may or may not be higher. As well as applying an early repayment charge on these mortgages, if a cashback mortgage is redeemed before the end of the agreed term, the lender may ask the borrower to repay all or part of the cashback.

With a tracker mortgage, the rate of interest is linked to a specified index, usually the Bank of England’s (BoE) base rate of interest. Whenever the base rate changes, so does the tracker’s interest rate and therefore the borrower’s monthly repayment. Tracker mortgages are a type of ‘variable rate’ mortgages.

When interest rates are low, the borrower’s monthly repayment might be less than it would be on a different type of mortgage, such as a fixed-rate or standard variable rate mortgage. But when interest rates are high, the reverse is true. And as the rate is likely to vary, the borrower can never be sure exactly when or whether their monthly repayment may change.