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Lifetime mortgages (equity release)

Equity release lifetime mortgages are are special types of loans, usually designed to run for the rest of your life. You borrow money secured against the value of your home to give you a lump sum now or a regular income. You do not make mortgage repayments to the lender and the loan and accrued interest is repaid to the lender when you die or you move into a residential care home.
 
You continue to own your own home. The lender agrees to give you a lump sum or a monthly income (or both), based on the value of your home. Nothing is repaid until you die or the property is sold, but interest is added to the amount you have borrowed each year. This is ‘rolled up’ over the life of the loan.
 
How much you can borrow depends on how much your home is worth and on your age. Generally if you are older you can borrow a greater percentage of your home’s value. You need to check whether the rate of interest can be fixed or capped and whether there are any redemption penalties associated with the mortgage. That will allow you to be sure of the maximum amount of interest added each year and the amount you owe at any time.
 
Most lenders offer a ‘no negative equity guarantee’. This means that the amount you owe can never be more than the value of your home. Even if the amount you borrow (plus the rolled up interest) is more than your property’s selling price, you will not have to repay any more than the amount your home is sold for.

An example

Your home is worth £100,000 and you are 65. You borrow £30,000 at a fixed rate of interest of 6.5%. There are no monthly payments. Instead, interest is added on and rolled up over the lifetime of the loan. Because you do not pay off any interest as you go along, the amount you owe mounts up more quickly so that after 15 years you owe the lender £77,155. This includes the £30,000 you originally borrowed. Any increase in the value of your home, after paying off the loan and interest, belongs to you or your family.

Advantages of lifetime mortgages

  • You continue to live in your home
  • No negative equity guarantee (if offered by the provider)
  • Plan provides a cash lump sum and/or partial payments
  • Only pay for the time you hold the mortgage
  • More flexible than Home Reversion Plans
  • The payment is larger if the applicant suffers impaired health
  • Portable – most are portable if you need to move home

Disadvantages of lifetime mortgages

  • Compound interest – the interest payment will increase significantly over time
  • You may not be able to move or downsize as you do not own all or any of your house
  • Full 100% Reversion - You will not own your home when you die, so you cannot leave it or any money from it to your family or other beneficiaries Partial Reversion - You will not own 100% of your home when you die, your family or other beneficiaries will inherit less
  • The home is bought at a discount so is less suitable for people in their 60's
  • If death occurs soon after taking out a plan, it could be poor value for money
  • Reversion companies may not buy 'unusual properties' and/or in certain locations
  • The decision cannot be overturned once the home is sold 

Important note

Releasing money from your home means you will leave less to your family. Tax and welfare benefits may also be affected. Check that your chosen plan will meet your needs if you want to move or sell your home, or if you want your family to inherit it.

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