Lifetime mortgages and equity release schemes

Mortgage advice

Equity Release schemes

There are a variety of Equity Release schemes, below we highlight the current types of scheme available.

Interest-only mortgages

You borrow a lump sum secured against the value of your home. You pay interest each month, but you have a lump sum to spend as you wish. The capital is eventually repaid out of the sale proceeds.

Pros

  • The amount you owe is fixed so any increase in the value of your home belongs to you or your family.
  • You can borrow at a fixed rate so you know exactly what you have to pay every month.

Cons

  • You need to be able to afford the ongoing interest payments: you should think about investing the lump sum you borrow.
  • Many schemes involve buying an annuity. Because annuity rates are so low and they increase with age, these schemes are often only suitable for elderly homeowners.
  • Variable rate loans can be very risky: your payments could rise more than your pension or other income.


Home income plans

These used to be the most popular type of equity release plans. You take out a mortgage against your home and use the money to buy an annuity which guarantees you an income for life. Mortgage payments are deducted from this monthly income, although the original capital is only repaid from the sale proceeds, normally after you die.

Pros

  • Regular income for life and the mortgage interest is deducted automatically.
  • The amount you owe is fixed and any increase in the value of your home belongs to you or your family.

 Cons

  • Not suitable for those looking for a substantial lump sum.
  • Income is normally fixed at outset, so will be eroded by inflation.
  • Built-in annuities are not the most competitive – you are generally better off shopping around for an annuity (if the plan permits this) or investing the money elsewhere.


Lifetime mortgages

The lender gives you a lump sum or monthly income (or both). You pay nothing – the interest is ‘rolled up’ into the equity release loan. The amount borrowed plus this interest is repaid out of the proceeds from the sale of the property after you die.

How much you can borrow depends on the value of your home and your age – the older you are, the higher the percentage of your property’s value you can borrow. Generally, you will not be advanced more than 50% of the value of the property.

Pros

  • No interest payable while you are alive, so you will get a higher income for the same sized loan than with an interest-only mortgage or home income plan.
  • Most loans are fixed-interest, so reducing risk.
  • Plans are available to people as young as 55.
  • The provider of a lifetime mortgage will be authorised and regulated by the Financial Services Authority.

Cons

  • The uncertainty about how much will have to be repaid at the end – and how much will be left for your family.
  • Interest payments can mount up quickly and will further reduce what your family will inherit. Your family could end up with nothing from the sale proceeds even though the lump sum you were lent only seemed a fairly small proportion of the home’s value.
  • Interest rates can be high.
  • You may not be able to get a top-up loan later.


Please contact us to discuss your equity release options or call 020 8302 5533 today.

The following statement applies to this type of mortgage:
This is a lifetime mortgage. To understand the risks and features, ask for a personalised illustration