Lifetime Mortgage Plans
Lifetime mortgages can be arranged in a
number of different ways. These include:
·
A “roll-up” mortgage
·
A drawdown mortgage
·
A home income plan
Roll-Up Mortgage
A loan is taken out, which is secured
against the value of your property. There is no repayment of any interest or
the initial loan amount until the property is sold. When the sale is complete,
the proceeds are used to repay the initial loan amount plus the accumulated
interest. Any excess will be returned to you or your estate.
It should be noted that interest is
compounded on a roll-up mortgage and the debt can increase quite quickly over
the years. Very often, this means that the percentage of the total property
value that can be borrowed is relatively low.
The table below shows the effects of a
£100,000 roll-up mortgage at a rate of 7% per year, based on a property
initially valued at £300,000.
|
Initial Property Value
|
£300,000
|
|
Initial Loan Amount
|
£100,000
|
|
Loan Rate (Fixed)
|
7%
|
|
Loan repaid after
|
House Price Inflation (%)
|
Property Value
|
Outstanding Loan & Interest
|
Equity
|
|
|
-5
|
£232,134
|
£140,255
|
£91,879
|
|
5 years
|
0
|
£300,000
|
£140,255
|
£159,745
|
|
|
3
|
£347,782
|
£140,255
|
£207,527
|
|
|
5
|
£382,884
|
£140,255
|
£242,629
|
|
|
-3
|
£221,227
|
£196,715
|
£24,512
|
|
10 years
|
0
|
£300,000
|
£196,715
|
£103,285
|
|
|
3
|
£403,175
|
£196,715
|
£206,460
|
|
|
5
|
£488,668
|
£196,715
|
£291,953
|
|
15 years
|
0
|
£300,000
|
£275,903
|
£24,097
|
|
|
3
|
£467,390
|
£275,903
|
£191,487
|
|
|
5
|
£623,678
|
£275,903
|
£347,775
|
*Under SHIP rules, providers offer a
no 'negative equity' guarantee meaning the loss rests with the provider not the
homeowner
With a roll-up mortgage it is possible that
at some point the amount you owe may be more than the value of your property.
This is called negative equity. There are a number of providers who offer a “no
negative equity guarantee”. This means that neither you, nor your
beneficiaries, will ever have to repay an amount that is larger than the value
of your home. The Annuity Bureau will only ever recommend schemes that provide
this guarantee.
Drawdown Mortgage
The underlying principle of a drawdown
mortgage is similar to the roll-up mortgage. The major difference is that,
rather than taking a large cash lump sum initially, a smaller amount is taken,
with the option to draw down more cash (up to an agreed limit) when it is
needed.
For example, you may agree to borrow
£100,000 on a £300,000 property but only take £10,000 initially. You would have
the ability to draw down another £90,000 at some point in the future but in the
meantime interest only accrues on the £10,000 drawn down.
Like a roll-up mortgage, the loan amount(s)
plus interest are repaid when the house is sold.
Home Income Plans
An interest only loan, or mortgage, is
taken out against the security of your home. The lump sum released is used to
buy an annuity, which generates guaranteed income for life. Part of the income
is used to make interest payments on the mortgage and the remaining net balance
is yours to use as you wish. The capital amount of the mortgage is repaid when
the house is sold.