Lifetime mortgages are the most popular option for older borrowers seeking to release equity from their homes to provide extra cash in retirement.

In recent months these loans have become more attractive, because equity release mortgage interest rates have held steady while mortgage rates in the house purchase market have edged upwards. Prudential, for instance, has just reported its highest quarterly sales of lifetime mortgages since it entered the market in 2005.

Lifetime mortgages are home loans which allow homeowners to realise cash for spending from the value of their home, while still allowing them to live in the property.

The way a lifetime mortgage works is simple. You borrow money from a mortgage lender with the loan secured against the value of your home – just as you do with a normal mortgage. However, instead of paying the loan back month by month, as you would with a normal mortgage loan, the interest rolls up and is repaid along with the capital that you have withdrawn only when the house is sold, on your death or when you move into long-term care.

Homeowners used to be wary of lifetime mortgages because of the high interest rates that tended to apply. Mortgage contracts also tended to be inflexible and borrowers always had hanging over them that, if house prices fell, they could be left with a bill for interest and capital that exceeded the value of the property.

Times have, however, changed, Interest rates have come down compared with mainstream loans, plans are more flexible and safeguards have been built in. One of the most important of the features of lifetime mortgages used for equity release is a no-negative-equity guarantee, which means the debt can never outgrow the property’s value.

Research by financial services analyst Defaqto found that the average rate on a lifetime mortgage with rolled-up interest is currently 6.84%, while those for 10- and 25-year fixed-rate mortgages are 6.31% and 6.26%, respectively.

David Black, principal consultant of banking for Defaqto and author of the report Equity Release – Entering the Mainstream, says: “Bearing in mind that the lifetime mortgage providers are bearing the additional cost of providing the no negative equity guarantee, get no income stream during the scheme and have no certainty of duration, these figures highlight the extremely competitive offerings available in the equity release market.”

When you take out a lifetime mortgage, you can either take a lump sum, with which you can buy an income – probably by buying an annuity – or you can simply take the money as cash to spend as you please, Many deals these days will also allow borrowers to draw down cash against the value of the property as and when they need it, rather than taking it all at once, which can be a useful was of keeping the interest that is rolling up to a minimum.

For instance, of the £51m of lifetime mortgage advances made by Prudential in the first quarter of this year, £38m were taken via the Pru’s drawdown product, with the rest as lump sums.

Keith Haggart, director of lifetime mortgages for the Pru, says: “We are predicting continued solid growth in the lifetime mortgage market this year.

“No negative equity guarantees, and fixed interest rates for the lifetime of the loan, means that there has never been a better time for customers to consider a lifetime mortgage.”

Says Black: “There is considerable latent demand for equity release, as people strive to find solutions to their retirement needs, aspirations and debt obligations.

Black also believes that equity release could be used for debt consolidation. “Also, with increasing numbers of people entering retirement with considerable personal debts, equity release is likely to be a commonly-used vehicle for debt consolidation.”

“In the medium term I expect to see equity release become a widely considered part of retirement planning, as it represents a potential solution to fill the aspirational income needs of the asset rich and income poor.”

Black concludes: “It is difficult to think of many products that enable you to release funds while continuing to enjoy the use of the underlying asset.”

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