Lifetime Mortgages
An introduction to lifetime mortgages
Fixed repayment mortgage
With this kind of home equity credit, you receive a cash lump sum and repay more than you originally borrowed when your house is eventually sold. The amount you repay is agreed at the time of taking out the home equity loan and is determined by your age and life expectancy.
This amount you repay is fixed although the lender may charge interest until your house is actually sold so the eventual balance of the home equity loan will not be known until the house is sold.
Interest-only mortgage
You receive a cash lump sum and make interest payments on the home equity loan each month. The initial lump sum is repaid when your house is eventually sold.
If the interest rate on the home equity loan repayments is variable, the monthly amount you are required to make will increase in the future so you must be confident that you will always be able to afford them. If your current income is fixed, this requires some serious consideration.
Home income plan
The lender pays you a cash lump sum. This money is then invested in an annuity which pays you a regular fixed income for life. You pay interest on the cash lump sum out of this income, keeping whatever is left for yourself. The balance of the home equity loan is paid off when your house is eventually sold.
This type of home equity credit is better suited to older people. If you take out a home income plan soon after retiring, the income you receive will be lower than if you are older when you first take out the plan.
Roll-up mortgage
This type of home equity loan pays out a cash lump sum, a regular income or both. Interest begins to accumulate on the amount you have borrowed as soon as you take out the home equity loan.
As well as paying interest on the home equity loan, you also pay interest on the interest, meaning that the balance of the loan can accumulate to a figure much larger than the original lump sum you received. The interest rate will either be fixed or variable; if it is variable, you must ensure you will be able to afford a rise in the interest rate in the future.
Dropdown mortgage
A dropdown mortgage is another type of roll-up mortgage, however you receive several smaller cash lump sums as and when you need them or at regular intervals; it’s up to you. Because this type of home equity loan is paid out in smaller amounts, the accumulated interest is generally lower than on a roll-up mortgage (depending on the amount of the loan to begin with).
Shared appreciation mortgage
Sometimes lenders include a clause in lifetime mortgages whereby they are entitled to a share in any increased value of your home when it is sold. So, if your house increases in value from the time you take out home equity credit to the time it is eventually paid off, the balance of the home equity loan will be higher.