A lump sum lifetime mortgage is often referred to as the standard, basic, or traditional equity release scheme. It can be known simply as a lifetime mortgage or roll-up mortgage. The names providers use are not as important as what it means to have a lump sum equity release. By discovering how it works and the pros and cons you can make an educated decision on what is right for you as a homeowner in retirement.
How Lump Sum Mortgage Schemes Works
With this loan you obtain a one-time lump sum of cash, which is tax free. The funds can be used in almost any way you wish including to buy a second home, pay off other debts, take a grand world holiday, or just live a comfortable daily life.
For the lump sum of cash you receive you have until a permanent move to a retirement home or until death to repay the loan. Upon death the home is sold to make the repayment and any equity left in the home is provided to your beneficiary.
The loan has compounding interest. Compounding interest is set on an annual percentage rate (APR). Typically the APR is fixed, but some companies also have a variable rate.
The provider will take your age, the property’s value and calculate the interest that will accrue based on the average life expectancy of a healthy person of your age. From this calculation a loan to value percentage is created providing you with the maximum lump sum amount the provider is willing to give you in a lifetime mortgage. The maximum lump sum can vary from provider to provider, based on the qualifications you need to meet.
Additionally, your age plays a big role in the maximum amount as a person who is younger, say age 55, potentially has 30 more years of life versus a person aged 85.
The name lump sum has been applied to other lifetime mortgages such as interest only and enhanced. This is because both interest only and enhanced versions provide a one-time lump sum with slight differences in terms. An enhanced option provides a higher maximum due to illness of the youngest homeowner, and the interest only requires an interest repayment each month. You can learn more about these and their pros/cons by visiting the explanation page for each.
• You receive tax free cash
• It can be used as you wish
• You receive the maximum amount provided for your age
• Repayment is made at the end rather than on a monthly basis
• You have funds during your retirement for comfort
• The loan has to be repaid
• You may not be able to leave an inheritance behind
With lump sum lifetime mortgages the main disadvantage is accruing so much interest that the capital sum plus interest is the full value of what your home can be sold for. However, when you are cash poor and property rich, sometimes a sacrifice is necessary to be comfortable during your retirement. Plus you can attain the loan to provide a gift to your beneficiaries during your life versus after you are gone.
Require further information?
Use the form below to request further information about this, or any other scheme, and an FCA regulated independent equity release adviser will be able to assist you over the phone, face-to-face, or via email.