With a lifetime mortgage you continue to own your home completely and are given a loan based on your age and the value of the property. You can pay the interest charged monthly or have the interest rolled up into the loan amount – this means there would be no monthly payments.
You can have the loan paid to you in a single lump sum or in smaller sums over a period of time – this is called a drawdown. The interest can be either fixed or variable and is added to the loan monthly or yearly. The interest does not have to be paid until you die or move into long term care.
Since interest is charged on the loan and also on interest already added, if you take a lump sum up front the amount you owe can grow quickly. If you take smaller lump sums over a period of time, the interest is lower since you are not charged it until you have drawn down the cash.
Will I ever owe more than my property is worth?
The amount you can borrow with a lifetime mortgage depends on your age and the value of your house: you can borrow a larger percentage of you home’s value the older you are.
Since the loan will not be paid off until the house is sold (upon your death or moving into long term care) then the increase in the value of your house will offset the interest owed. There is however, always a risk that house prices may fall, or not rise enough, and leave the amount owed more than the value of the house. In this circumstance, your estate would be left with a debt to pay.
To avoid this risk, you can opt for a “no negative equity guarantee” which ensures that the repayment amount won’t exceed the proceeds from the sale of your house. This can provide additional peace of mind.
Take lump sums as you need them
If the lump sum you are offered when applying for an equity release mortgage is more than you need then it is worth considering only taking what you need now and then taking more in the future as required. This avoids you incurring interest charges on money you do not need at the time.