If you’re considering an over 55 equity release scheme, one of the important decisions you have to make is which type of scheme you are going to opt for. Lifetime mortgages account for 99% of the market. Our guide to the pros and cons will help you decide if this is the best solution for you.
There are two types of lifetime mortgages: roll-up mortgages and interest-only mortgages. We’ll talk about the pros and cons of interest-only mortgages in a future blog, but this is what you need to know about ‘roll up’ mortgages.
What is a roll-up lifetime mortgage?
A roll-up lifetime mortgage is a loan taken against the value of your home. You don’t need to repay the interest on the loan – it can be ‘rolled up’ with the debt.
Advantages of roll-up lifetime mortgages.
- You still own your own home – even if you take out a mortgage up to 99.9% of the value of your property, you are still the legal owner. This means you will benefit from any increase in the value of your property and, if you take out a lifetime mortgage provided by a member of the Equity release Council you cannot be thrown out of your home, as long as you stick to the terms of the agreement. You can also move home, if you wish.
“Equity release [has enabled us] to repay debts to free up disposable income.”
- You can choose how you receive the money released through a lifetime mortgage:
a. A lump sum
b. Regular payments
c. A combination of lump sum and regular payments
d. You may also be able to opt for a drawdown facility, enabling you to take out additional sums in the future to give you peace of mind about unforeseen events.
Interest on any subsequent payments only starts to accumulate when you receive the money, meaning your total debt at the end of the plan is lower than if you receive it all in one go.
- No monthly repayment: You can opt to roll up the interest onto the debt of the original loan, meaning you don’t have to pay anything back each month.
- Option to pay off the interest: You can choose to pay off the interest (or some of it), meaning that your debt won’t increase beyond the original loan.
- Option to reduce your debt: 80% of products in 2018 allowed voluntary, penalty-free, ad-hoc payments, meaning you could choose to reduce your debt by paying a bit off each year, or when you can.
- Potentially more money if you are ill: It may be possible to release more equity if you are not in good health.
- You may be able to take out additional loans in the future: You may be able to release more equity at a later date, but this is not guaranteed.
- Additional protection of the equity in your home: You can choose to ‘protect’ a percentage of the eventual sale of your home to insure a guaranteed inheritance for the beneficiaries named in your will. Lifetime mortgages provided by members of the Equity Release Council also have a ‘no negative equity’ guarantee, meaning that the sum owed at the end of the scheme by you or your heirs will never be greater than the value of your property.
- Your heirs can choose to keep your property after your death: This is normally possible, as long as they can repay the total debt (loan plus interest) within six to 12 months.
Disadvantages of roll-up lifetime mortgages.
- The debt on your loan may accumulate quickly: The younger you are at the start of the plan, the higher the total debt is likely to be at the end, as you are likely to have more years to live.
- There will be less for you or your heirs at the end of the plan: The total value of your estate will be reduced when you come to sell your home, either because you need to move into a care home or on death.
- Interest rates may rise: Due to the long-term nature of the loan, interest rates may rise above the rate when you take it out.
- You may face early redemption costs.
- Unpredictable: When you take out the mortgage, no-one can predict what the final debt owing at the end of the plan will be. That will depend upon how long the loan is in place and interest rates over this period.
- Potential impact on means-tested benefits: Over 55 equity release through a lifetime mortgage may affect your eligibility for means-tested state benefits, such as guaranteed pensions credit and savings pension credit. 55+ Equity Release will always check this when reviewing and advising on the options available to you.
All types of over 55 equity release have both advantages and disadvantages. That’s why it’s really important to make sure you work with a qualified adviser to consider all the options so you have confidence that you are making the right decision for you.
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