Understanding later life lending and equity release

What is later life lending?

Later life lending covers several forms of mortgage borrowing designed primarily for people aged 55 and over. It can be used for most legal purposes linked to property purchase or refinance, debt consolidation, income smoothing in retirement, care costs, home improvements, gifts to family, or broader lifestyle needs.

What types of later life lending products are there?

Later life lending can be split into 3 main products, which are all types of mortgages:

1. Traditional mortgages

Traditional mortgages are available from banks and building societies. Individuals will be required to complete an affordability assessment and agree to make set monthly payments.

These mortgages come with a set term (usually up to retirement age) and individuals choose between capital repayment and interest only:

• Capital repayment means the individual will pay off the interest and some of the capital each month, meaning that at the end of the selected term there will be no outstanding balance.
• Interest only allows the individual to pay just the interest each month, however at the end of the term, they will need to repay the outstanding balance.

Traditional mortgages come with either fixed or variable interest rates:

• Fixed rates are generally fixed for a period between 2 and 10 years and come with early repayment charges during the fixed period.
• Variable mortgages are either based on the lenders standard variable rate or the Bank of England base rate and generally come without early repayment charges.

These mortgages will come with the ability to overpay, generally up to 10% of the capital balance each year before early repayment charges start to apply. Overpayments can be made regularly, as a one-off payment or on an ad-hoc basis, subject to the lender's criteria.

2. Retirement interest-only mortgages

Like traditional mortgages, retirement interest-only mortgages require an affordability assessment. However, the individual is only required to make the interest payments each month. The outstanding balance is only repaid when the last applicant dies or enters long term care, usually by sale of the property.

Interest rates on these mortgages can either be fixed for a set term; for example, 2 or 5 years or for life and there will be early repayment charges either for the set term or for a period if a lifetime fix is selected.

These mortgages can also come with the ability to overpay some of the capital balance each year without early repayment charges applying, subject to lender criteria.

3. Lifetime mortgages

Lifetime mortgages don't require an affordability calculation as any monthly payments are optional for the borrower. The interest compounds over the course of the loan and the total outstanding balance is repaid upon the death or entry into long-term care of the last applicant, usually by the sale of the property.

With all products from lenders that are members of the Equity Release Council, the industry trade body, there will be a "no-negative equity guarantee". This means that the amount owed at the end of the loan will not exceed the value of the property.

Interest rates on these mortgages are set at outset for the duration of the mortgage and come with either variable or fixed early repayment charges:

• Variable early repayment charges are for the term of the loan and are based on long term gilt rates.
• Fixed early repayment charges apply for a set period at the start of the loan such as the first 7 or 10 years.

Lifetime mortgages also offer the ability to make payments without early repayment charges applying either by agreeing to make a regular payment against the interest which can range from £25 to 100% of the monthly interest payments, or by making overpayments against the capital balance subject to agreed limits.

Lifetime mortgages can also come with a number of other features such as:

• Drawdown – the ability to take an initial lump sum, then set up a reserve fund which can be accessed at a later time.
• Inheritance guarantee – the ability to ring fence part of the property for Inheritance.
• Downsizing protection – the ability to downsize without early repayment charges applying.

Later life lending comparison

Why homeowners consider later life lending

With 56%¹ of UK homeowners being over the age of 55, many are looking at how their property wealth can support their financial needs in their later years. The reasons for considering later life lending are diverse and often tailored to individual circumstances. 

¹England: homeownership by age 2024 

To repay an existing mortgage 

An increasing number of people are extending their borrowing into their 70s and beyond². Later life lending can offer a solution for remortgaging onto a product that is more favourable for older homeowners, addressing the growing need for repayment methods in later life. 

²Homeowners could be paying off mortgages in their 70s as higher rates force borrowers to stretch terms to 35 years | This is Money 

To fund home improvements 

Homeowners' needs evolve over time, and improvements can range from future-proofing the home to make it more liveable to building extensions that allow more space for family visits. Later life lending provides the financial means to undertake such projects. 

To buy a new home 

With various products and income types considered, later life lending can make moving to a new property or even buying a second home a workable possibility for older homeowners, expanding their living choices. 

To gift an early inheritance 

Rather than waiting until they have passed away, homeowners can use later life lending to advance an inheritance and see its benefits within their lifetime. This can help loved ones with significant life events such as buying a property or funding a wedding. 

To fund holidays and large purchases 

Later life lending can also provide the means for homeowners to enjoy their retirement, whether it be through paying for cruises, international holidays, or even buying their dream cars. 

The equity release customer journey 

Lifetime mortgages, the most popular type of equity release product in the UK, allow homeowners to borrow against their home’s value without having to move out or sell. The equity release process is distinct from conventional mortgage borrowing and involves several key steps: 

Enquiry 

The journey often begins with the customer making an enquiry or being referred to a specialist by their existing financial adviser. 

Fact-finding 

An equity release adviser will gather detailed information about the customer's financial plans and current circumstances to understand their needs fully. 

Advice 

Based on the gathered information, the adviser will make a recommendation. If a lifetime mortgage is considered suitable, the adviser will help with the application process. 

Application 

The necessary paperwork is filled out with the adviser’s help and then given to the lender. 

Valuation 

The lender will have the property valued to ensure it provides suitable security for the loan. 

Offer 

If the property's valuation matches the estimate given during the application, the lender will issue an offer. 

Legal advice 

An important requirement from the Equity Release Council is that the customer receives independent legal advice to ensure they understand the terms of their agreement. 

Completion 

Upon accepting the offer and completing the necessary paperwork, the lifetime mortgage can go ahead. The funds are then sent to the solicitor, who passes them on to the customer. 

The role of the Equity Release Council 

The Equity Release Council (ERC) is the industry trade body for equity release in the UK. Established in 1991 as the Safe Home Income Plan (SHIP), it rebranded in 2012. The ERC includes lenders, advisers, solicitors, and other professionals involved in equity release. 

Customer-facing safeguards 

The ERC enforces several product standards to ensure customer protection, including:

• A no negative equity guarantee, ensuring customers never owe more than their home's value.
• Fixed or capped interest rates for lifetime mortgages.
• The right for customers to move home and transfer the product, subject to lender’s criteria and the new home providing suitable security for the loan.
• The right to remain in their home for life or until moving into long-term care, provided it stays their primary residence and they meet the terms of the contract.
• The right to make voluntary payments, penalty-free, subject to the lender’s criteria. 

The equity release process 

As part of the ERC's requirements, customers must receive independent legal advice before completing an equity release product. They can choose their own solicitor or go with a recommendation from their adviser, but the solicitor will act on behalf of the customer and ensure that they understand the terms of the contract they are entering. 

Final thoughts 

Later life lending and equity release offer valuable financial solutions for homeowners in their later years, providing access to property wealth to enhance their quality of life. With the safeguards and structured processes provided by the Equity Release Council, homeowners can navigate this financial choice with confidence and security.