25 April 2014
Equity Release
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What Is An Interest Only Lifetime Mortgage Scheme?

Financial planning during retirement is very important. After all, these are known as the golden years of life for a good reason. It’s because this is the time that you’re finally free to enjoy the fruits of your working life. Planning your finances properly during this time can make all the difference between a good retirement and an uncomfortable one. Equity release schemes provide an interesting option for those looking at retirement planning solutions.

Interest only lifetime mortgage schemes have proved to be quite a popular form of financial planning during retirement. It is a way to use the monetary value trapped into your property as cash, without actually selling the home, or even having to move out. The equity release market has grown significantly since the time these schemes were introduced. Today, there are newer interest only lifetime mortgage equity release schemes available, from a variety of in retirement providers.

First let’s consider two main types of equity release plans – lifetime mortgage and home reversion: –

• A home reversion plan is when you sell a proportion of the house to the lender in exchange for the cash equity, and retain a proportion of the properties title. The ownership of the house is therefore shared between the original owner and the home reversion provider. When the house is eventually sold, the estate receives their share of percentage you originally retained.

• A lifetime mortgage is different in that it is essentially a loan that is taken out against the property. This loan is calculated based on the value of the property and the age of the youngest applicant. The amount borrowed, plus compounded interest is repaid once the property is sold. In both home reversion as well as lifetime mortgage, the property can only be sold for the lenders benefit once the owner has either moved into a permanent care home, or died.

Most lifetime mortgages taken out are the roll-up lifetime mortgage versions which essentially are a mortgage where NO monthly repayments are required. As such the balance increases year-on-year where it approximately doubles over a 10-11 year period. Consideration must always therefore be given as to how much inheritance the children are destined to receive.

However, a new breed of lifetime mortgages are starting to emerge whereby more consideration is required towards the children & somewhat protecting their inheritance. There are some lifetime mortgages, known as interest only lifetime mortgages, which do not incur any compound interest building up on the principle amount at all. Instead, the applicant pays interest monthly, for as long as they live or until they move into care. The amount to be repaid remains exactly equal to the amount charged on a monthly basis. Such equity release schemes have higher interest rates than residential mortgages from high street lenders as there interest rates are fixed for life as there needs to be security of payment for this age group who are usually on fixed incomes.

Interest only lifetime mortgages can be researched and compared online as there are websites like CompareEquityRelease.com that allow you to search for and compare different plans. Equity release works for some and doesn’t for others. It is therefore important to seek objective expert advice before signing up for any form of equity release mortgage.

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