If you are interested in releasing equity from your home, you will be embroiled in the process of determining the best solution available to suit your needs. This will involve reading through difficult mortgage regulation documents and countless banking brochures, both of which can be confusing. You may also encounter confusing financial products like interest only mortgages and interest only lifetime mortgages. These are two different products although they sound alike.
If you are attempting to decode various financial papers, you will more than likely find yourself fairly overwhelmed, unless of course you have a lot of experience dealing with this sort of thing. Often, it is best to make a list of questions while you are reading, and to take these to an independent advisor in order to achieve clear answers.
Attempting to fathom the difference between an interest only mortgage for example, and the interest only lifetime equivalent is hardly a job for you if you have little or no specialist knowledge. You will find, however, that a professional will be able to point out the distinctions with ease.
Indeed, important financial decisions should never be made alone. It is always important to seek the advice and the support of people in the know. This will help you to choose wisely when sifting through incomprehensible product descriptions, and to ultimately place yourself in a more secure financial position.
Regulating the Industry
There are plenty of regulatory bodies that draft up mortgage regulation documents. These are the same bodies of government that make such confusing details, yet ensure you are getting a solid product based on what you need with transparency and clarity. The Financial Conduct Authority is very helpful in ensuring brokers and financial advisers are regulated, even qualified to help you out. By seeking help through the FCA website or looking on a broker website, you should be able to tell if they adhere to FCA regulations. SHIP and the Equity Release Council are two other authorities to look for when you are examining lifetime mortgage products.
Learning the Differences
Two products have been mentioned here with regards to mortgage options. They are mentioned because they are different although the names are extremely similar. There is one little word, lifetime, which makes these two products different as night and day.
Lifetime by definition means your life span. So when a mortgage is called lifetime mortgage it implies it has something to do with your lifespan. When you just see mortgage you can be fairly sure the reference is to your standard mortgage product.
Lifetime mortgages allow you to live in your property until death. If you need long term care on a permanent basis the mortgage must be repaid, unless your partner is remaining in the home and a part of the contract. At anytime you sell the house you need to pay the mortgage back or request a transfer to a new property. Some companies do have transfer options as long as the home you live in is yours and it is your main residence.
Now that you understand the distinction of lifetime mortgage, you can understand that in a standard interest only mortgage, you have a specific period of time to repay the loan. The standard is 10 years. At the end of a ten year time span you will have a balloon payment. This payment is the entire loan in full plus any interest that has yet to be paid.
Interest Accrual on Interest Only
Interest is based on an annual percentage rate (APR). You pay a monthly payment which is a percentage of the APR based on the amount of the loan. In other words, the loan amount accrues 5% for example in a full year. So you pay 5% divided by 12 based on the loan amount. The principle remains the same, but the interest is paid each month. At the end of the loan you may not have paid the interest for that last month, which means the balloon payment and all interest is then due. Even with interest only lifetime mortgages you pay the interest on a monthly basis. The difference is the capital sum is due much later and without a time limit other than death. So you could pay interest each month for 30 years.
In short, choosing your equity release scheme is not something to be taken lightly. In order to ensure that you make a good, informed decision, you will want to take care that you do as much reading as you can, and that you seek advice where you find there are gaps in your knowledge when looking over mortgage regulation.