LIFETIME MORTGAGES

There are two main types of lifetime mortgages Rolled-Up Interest and Interest- only

Rolled-up interest loans

The lender gives you a lump sum based on the value of your home. Nothing is repaid until you die or the property is sold, but interest is added to the amount you have borrowed each year. This is rolled up over the life of the loan.

Some lenders provide a lump sum and the option to drawdown further lump sums when you need it. Other lenders offer a monthly income or a lump sum plus a monthly income.

The amount you borrow depends on how much your home is worth and your age. The older you are the greater the percentage of your home's value you can borrow. You need to check whether the rate of interest you will pay is fixed or variable. If it variable it could be capped, which means it cannot go above a certain level. That will allow you to be sure about the maximum amount of interest added each year and the amount you owe at any time.

Here is an example

Your home is worth £100,000. You borrow £30,000 at a fixed rate of 6.5%. There are no monthly repayments. Instead interest is added on a rolled up over the lifetime of loan. Because you do not pay off any interest as you go along the amount you owe mounts up more quickly so that after 10 years you owe the lender £56,314. This includes the £30,000 you originally borrowed. When your home is sold £56,314 must be paid to the lender. If your house is still worth £100,000 the amount left (£43,686) belongs to you or your family. If the value of your home has increased the amount left to you or your family will be more.

Interest-only mortgage

You borrow a lump sum secured against the value of your home. You pay interest on the loan each month, and the lump sum you originally borrowed is repaid when your home is eventually sold. You need to be able to afford the interest payments out your pension or other income.

The interest rate may be fixed or variable. But if it is variable and your pension or other source of income is fixed you will find it more difficult to meet your repayments if interest rates rise.

One option is to invest your lump sum in an annuity that gives you a regular income. You use this income to pay the interest on the loan and what is left over is yours to spend. But because annuity rates are low this type of arrangement is really only suitable for very elderly homeowners. Here is an example

You home is worth £100,000. You borrow £30,000 at a fixed rate of 6.5%. Your interest payments would be £162.50 a month. After 10 years you will have paid £19,500. You still owe the original £30,000 which would be repaid from the proceeds of selling your house. Any increase in the value of your home would belong to you or your family.