Lifetime Mortgage Interest Rates

Why are Lifetime Mortgage rates so different to 'normal' mortgage rates?

Although a lifetime mortgage is still a loan secured against your home, the interest rates offered at the start don’t always move in line with standard residential mortgage rates. That can feel confusing, so it’s worth understanding why the two behave differently.

The Bank of England sets the ‘Base Rate’ of interest, and movements reflect financial conditions in the UK. When this rate rises or falls, borrowing costs across the market often follow. As a result, standard mortgage rates tend to reflect current Base Rate movements - or expectations of where that rate is heading.

Lifetime mortgage rates, however, work differently. Rather than being driven mainly by the Base Rate, they are influenced far more by long-term government bond rates - commonly known as ‘gilts’.

Gilts are bonds issued by the UK government to raise money for public spending. Investors buy these bonds, effectively lending money to the government. In return, the government agrees to repay the loan at a fixed future date and provide a return along the way - this return is known as the ‘yield’.

These Gilt yields are a key influence on lifetime mortgage rates. In particular, lenders tend to focus on long-term gilts, such as 15-year gilts. Gilt yields can move several times a day and are publicly available to view online.

So why do lifetime mortgage lenders focus on GILTs rather than the Base Rate?

It comes down to how long the loan is expected to run. Standard mortgages are often repaid or replaced within 2 to 5 years when borrowers remortgage. Lifetime mortgages are different - they are designed to last for the rest of the borrower’s life, meaning lenders may not get their money back for many years.

Because of this, lenders price these loans based on long-term investment returns. In simple terms, they compare the return they could earn from gilts (or similar long-term investments) with the return from lending via a lifetime mortgage. This comparison helps determine the interest rate they offer.

One key point to remember is that once a lifetime mortgage starts, the interest rate is fixed for life. It won’t change, regardless of what happens to interest rates in the future.

A Lifetime Mortgage is only applicable to those 55 and over, and it could affect eligibility to state means-tested benefits and the inheritance you may leave. To understand the features and risks, ask for a personalised illustration. Equity release includes Lifetime Mortgages and Home Reversion Schemes. We can advise and arrange Lifetime Mortgages and will refer to an approved specialist for Home Reversion schemes.