Taking out a mortgage
There are two main types of lifetime mortgage
- Interest-only mortgagesYou 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 of 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 may be to invest the lump sum you borrow, perhaps in an annuity that gives you a regular income. You use the income to pay the interest on the loan, and what is left over is yours to spend. But because annuity rates are low and depend on your age, this type of loan is really only suitable for very elderly homeowners.
Here is an example.
Your home is worth £100,000. You borrow £30,000 at a fixed rate of interest of 6.5%. Your interest payments would be £162.50 a month. After 15 years, you will have paid £29,250. 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 surviving family.
- Rolled-up interest loans
The lender gives you a lump sum or a monthly income (or both), 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.
The amount you can borrow depends on how much your home is worth and on 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 is variable, it could also 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 interest of 6.5%. There are no monthly payments. Instead, interest is added on and rolled up over the lifetime of the loan. Because you do not pay off any interest as you go along, the amount you owe mounts up more quickly so that after 15 years you owe the lender £77,155. This includes the £30,000 you originally borrowed. When your home is sold, £77,155 must be paid to the lender. If it is still worth £100,000, the amount left (£22, 845) 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.
It could happen that your home loses value during the period of your loan. Most lenders offer a 'no negative equity' guarantee to cover this situation. This means that the amount you pay back to the lender will never be more than the value of your home. Even if the amount you borrow (plus the rolled-up interest) is more than your property's selling price, you will not have to repay any more than the amount your home is sold for, as long as you maintain your home properly and fulfil your part of the mortgage contract.
Here is an example.
Your home is worth £150,000. You borrow £45,000 at a fixed rate of interest of 7%. There are no monthly payments. Interest is added on and rolled up over the lifetime of the loan. After 20 years you owe the lender £174,136. This includes the £45,000 you originally borrowed. If, after you died, the house was sold for £150,000, this is all that would be paid back to the lender.
- Shared and protected appreciation mortgages
There is a third type of lifetime mortgage which is not currently available, but which has been offered in the past and may be offered again in the future. You borrow a lump sum based on the value of your home and nothing is repaid until you die or the property is sold. At that stage, the amount you originally borrowed is paid back, together with an agreed percentage of the amount by which your home has increased in value.
This means that the amount of 'interest' you pay depends on what has happened to the value of your home since you took out the loan. If its price has gone up sharply, the 'interest' you pay is higher. If its price has risen more slowly, the lower the amount of 'interest' you pay. Either way, you will not know the full cost of the loan until it is finally paid back.
It may be possible to take out a protected appreciation mortgage so you can pay a specific amount of interest. The interest is worked out at the beginning so you can work out how much you will owe at any stage.
Here are some examples.
Your home is worth £100,000. You borrow £30,000 and agree that the lender will also get 50% of any increase in your property's value. When you or your family sell your home, the £30,000 you originally borrowed is repaid, plus half of any amount by which your property has grown in value. If you sold your home for £150,000, that would be £50,000 more than it was worth when you took out the loan. You or your family will then owe the lender £55,000. This is made up of the £30,000 you originally borrowed, plus £25,000 - half of the £50,000 increase in the property's value. If you sell your home for £120,000, you owe the lender £40,000 (the £30,000 you originally borrowed, plus £10,000 ? half of the £20,000 increase in the property's value). If there is no increase in the property's value, or even if it reduces, and it sells for only £90,000, you will only have to repay the £30,000 you borrowed in the first place.
