How do lifetime mortgages work?

Like any mortgage, a lifetime mortgage is a loan secured against your home.

The loan can either be taken as a lump sum or in amounts drawn down over a set period or for life.

Interest is charged on the loan, which you either pay, or more typically, allow to roll up.

If you draw down the loan, you only pay interest on the amounts you take from the time you take them.

When you die or move out, your home is sold and the money is used to pay off the loan.

Anything that's left over goes to your beneficiaries.

If there isn't enough money left from the sale to pay off the loan, your beneficiaries would need to make up any shortfall from your estate.

To guard against this, most providers offer a no-negative-equity guarantee.

This means that you (or your beneficiaries) won't have to pay back more than the value of your home, even if the debt has become larger than this.

There are three different types of lifetime mortgages to choose from:

• A roll-up mortgage
• A fixed-repayment lifetime mortgage
• An interest-paying mortgage

Roll-up mortgage

Warning

According to Which?, at the current rates of interest, the debt from a roll-up mortgage will almost double in 11 years.

With a roll-up mortgage, interest is added to the loan.

You don't make any regular payments, but the amount you originally borrowed, plus the rolled-up interest, needs to be repaid when your home is eventually sold.

The interest you owe can grow quickly, because, unlike a repayment mortgage, the amount you owe is growing all the time.

Interest-paying mortgage

You pay the interest on some or all of the loan monthly, rather than allowing it to roll up.

When your home is eventually sold, the amount you originally borrowed is repaid.

Interest rates can either be fixed or variable.

Take special care with variable interest rates - you'll never know exactly how much you'll be paying.