A lifetime mortgage is one of the options that allow homeowners over age 55 to release capital from their home. It is a mortgage that is given to homeowners that are in their retirement period and is secured against their property. A lifetime equity release differs from a typical mortgage that is offered to those that are not yet in their retirement period in that the amount borrowed is repaid when the policy holder dies. As with a typical mortgage, interest is applied to the initial amount borrowed; however, the type of lifetime loan will determine when and how the interest amount is repaid.
Types of Equity Releases for Retirees
There are four main types of lifetime mortgages. The rolled-up interest lifetime mortgage calculates on the basis of compound interest, which means that interest is charged on top of interest annually. The borrowed amount is paid to the applicant immediately as a lump sum amount or is gradually paid over a period of time. The loan amount and the accumulated interest are normally paid when the policy holder dies or moves into long term care.
The interest only lifetime loan charges interest on a monthly basis. The interest amount has to be repaid every month. The interest only lifetime loan is normally offered to those who are over 55 years and are able usually able to prove that they can make the monthly payment. Again, the initial loan amount is normally paid when the policy holder dies. This type of mortgage allows homeowners to leave an inheritance for their children or grandchildren because once the property is sold, only the initial loan amount needs to be repaid. The remaining amount is normally left for the children or grandchildren.
The drawdown mortgage allows applicants to release capital from their property but the money is only used when needed. The applicant will take a lower initial capital lump sum, sufficient maybe to meet their first or second year’s capital requirements. As they have not taken the full facility, the remaining funds are then held in reserve by the equity release company until such time it is required by the applicant. On a drawdown plan, interest is only calculated on the drawdown amount, NOT the full facility which is where its popularity lies. By only paying interest on the withdrawn amount means less interest is charged over the longer term which is ultimately better for the beneficiaries.
Another type of lifetime mortgage is the home income plan in which the money that is released from the property is used to buy an annuity that supplies homeowners with an income that is fixed for the rest of their life. These types of schemes are not as popular these days due to the advent of drawdown schemes which allows the applicant to have more control over when and how to take the capital required.
Newer Products on the Market
Lifetime equity release schemes change with time. You may have seen some of these products for over ten years, but others might have appeared more recently. An enhanced equity release is one of the newer schemes to be released on the market. It is a mortgage for those with an illness. While it cannot be taken out any earlier than 55 years of age, it is for those who have a lower expected lifespan.
In other words, if you are ill this mortgage will pay off. It might sound cold that an illness can help you gain money; however, it is true. If there is a reason your life expectancy might be less than the average retiree, you could receive a larger lump sum of tax free cash to use during your life perhaps to pay those high medical bills as you try treatments not part of the NHS approved treatments. Whether that is the case or not, you have a lump sum with interest accruing for the duration of your life. The important part is that you have money when you need it and death is when the amount is to be repaid.
Lifetime mortgage is a product that works for some individuals. It certainly takes understanding the financial side of the situation as not all of these products will offer an inheritance to your family. It is often best to speak with a financial expert in the mortgage market, but one independent from the lifetime equity release companies. This ensures you receive unbiased help. Also include your family in on the discussion as they can also make a difference to your decision.