A lifetime mortgage is just like a normal mortgage in that it is taken against a property and interest is calculated on it. However, it differs in that it does not have a fixed duration in that it lasts for the rest of your life. Hence the term lifetime! In order to apply and qualify for a lifetime loan, you need to be at least 55 years. It is also equity release possible to apply for a joint lifetime loan; however, the youngest person applying for this product needs to be at least 55 years old.
Exploring Lifetime Equity Releases
The lifetime mortgage differs from a normal mortgage in that you do not need to make a monthly repayment. A normal mortgage calculates a monthly amount based on the initial loan amount and the interest. However, a lifetime equity release does not calculate any monthly amount with the exception of the interest only lifetime loan. The different loans are assessed:
• Regular lifetime equity release: it is called a lump sum mortgage and sometimes a roll-up mortgage because the interest rolls into the principle amount of the loan. It adds up until the mortgage is repaid at the end of a person’s life.
• Interest Only lifetime loan: interest is paid on this loan unlike all other lifetime equity releases. The principle balance is still a lump sum and paid at the end of the loan.
• Drawdown mortgage: unlike the lump sum mortgage this one offers an equity account that one can draw on as needed. There is still an initial lump sum taken; however, it is smaller and it leaves plenty in the account to be used as necessary. Any money not used is not charged interest.
• Enhanced lifetime loan: this is a specialty lifetime equity release set up for individuals who have a significant threat to a longer life. Individuals with cancer, diabetes, heart disease and other illnesses can qualify as long as they also meet the other parameters of these loans. The idea is to provide a larger lump sum on the assumption it will be paid back quicker.
How Much you can Borrow and Interest Accrual
The amount that you are allowed to borrow will be calculated based on your current age and the worth of your property. An equity release calculator is normally used to calculate this amount. In some cases, if your health is poor, you might receive a higher amount. The advantage of the lifetime loan is that you can be guaranteed that the initial loan amount will always remain the same and will never become higher than the current value of your property.
Interest accrual is calculated on an annual basis. With the Interest Only product it is an APR that is broken down into a monthly payment for easier repayment.
No Negative Equity
Equity can turn negative in one’s home. If your home is calculated at a value of 250,000 pounds, but the economy declines as it did just a few years ago you might be looking at a value lessened by 50,000 pounds or more. The lifetime equity release is set up so that you never borrow 100% of the equity in your home. This is for two purposes. The first is to ensure you do not hit negative equity with the principle balance. The second is so the interest that adds up during the life of the loan will remain inside the home value as well.
Should a devaluation of the house occur, then there is a no negative equity clause in the contract that prevents you or your beneficiaries from owing more money than the house is actually worth.
The Inheritance Worry
Since devaluation of property can occur, it also means there can be issues with leaving an inheritance behind. There are two ways around this. The first is to choose a product that ensures you will not go over the value of your property. You can do this with the drawdown or interest only mortgage. The interest only mortgage never gains in what is owed because the principle balance does not accrue interest. The drawdown is more on the owner’s behalf in that the more you withdraw from the account the less you will leave for beneficiaries.
The second option is to have an inheritance guarantee as part of the loan so a part of the house cannot be used as equity or taken in the event changes occur to the value of the home.
Lifetime mortgage is a beneficial product for many homeowners and something to obtain advice on before signing contracts. Specialist independent advice can be found here.
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