Category Archives: Interest Only Lifetime Mortgage

How does a Lifetime Mortgage Scheme and a Home Reversion differ?

As people live for longer, planning carefully for retirement becomes more and more important. Living costs are on the rise, and there are a growing number of people who own valuable property but are strapped for cash during old age. This is why equity release schemes have become a popular concept. Because it allows people to free up the equity tied up in their homes, without the need to sell the property or move.

Equity release schemes have come a long way since they were first introduced to the market. Rising demand for equity release solutions resulted in increased competition among providers, and today, the equity release market is much more favourable for customers. Equity release plans available today are much more flexible, and interest rates are also generally lower than a few years back.

The two main types of equity release are lifetime mortgage deals and home reversion schemes. Both types of equity release allow customers to free up some of the equity built up in their home and use it as cash. The amount can be taken as a lump sum or in the form of monthly installments. Most equity release schemes need to be repaid only when the owner has died or moved into care, which is when the property can be sold.

A lifetime mortgage is a loan that is taken out on the property. In this case, the applicant retains full ownership of the house. The loan along with the accumulated interest is repaid once the property is sold. Interest that is incurred on the amount is added to the principle amount, so that effectively, interest is charged on the previous interest. This is known as compound interest. One of the most common concerns with compound interest is that the debt can quickly grow very large.

There are some new lifetime mortgages known as interest only mortgages, which do not incur any compound interest. Instead, interest is paid monthly, and in the end the amount to be repaid remains exactly the same as the original amount that was borrowed. Interest only lifetime mortgages may have higher interest rates in order to be financially viable for the lender.

Home reversion plans involve selling a certain portion of the property to the lender. The ownership is transferred into the lender’s name, and the customer retains some portion of the ownership. When the house is sold, the lender retains the same proportion of the sale value. Both home reversion and lifetime mortgage equity release schemes have their own pros and cons. If you’re considering equity release as an option, consult a financial advisor for objective and professional guidance.

How is my Equity Release paid off?

Equity release is a relatively new concept in the world of finance. When property prices began to soar over the last two decades, a situation arose where many people owned valuable properties, but due to rising costs of living did not have enough income to support their lifestyle during retirement. Equity release was an answer to this gap in the market.

Equity release mortgages allow you to free up some of the equity built up on your property, without the need to sell the house. It allows you to continue living in the house, but free up some of the value of the house and get it as a loan, either as a lump sum or in smaller regular installments.

The two main types of equity release mortgages are lifetime mortgages and home reversion plans. A lifetime mortgage is a loan taken against the home. Interest is generated on the loan, which usually compounds and results in a debt much bigger than the original loan. However, such loans do not need to be repaid until the homeowner dies or moves into permanent care, and the house is sold.

Modern equity release mortgages have a no negative equity policy. This means that if your debt becomes larger than the sale value of the house, the negative equity does not need to be repaid and is written off by the lender. This is how lifetime mortgages are repaid. In case of a joint application, the loan is expected to be repaid only after both the applicants have either died or gone into care.

Home reversion is a way to sell a portion of the house notionally, and take the loan of that amount. The loan and interest are repaid when the house is sold. The principal amount that needs to be repaid is the same proportion borrowed of the total sale value of the house. Therefore, the amount that needs to be repaid reflects the market value when the property is sold.

When interest builds up on the principal amount, this interest is added to the principal and the next year, interest is charged on this bigger amount. This compounding interest can result in huge debts, which is one of the main risks concerning equity release mortgages. Equity release lenders now offer what are known as interest only lifetime equity release mortgages wherein unlike roll up mortgages, you only pay the interest every month and when the equity release scheme ends, the amount to be returned remains the same as the amount borrowed.