Lump sum lifetime mortgages are in various forms including the standard form. To understand if this product is right for any homeowner comparing the different products by advantages and disadvantages is necessary. Since there are a couple of different ways to obtain a lump sum lifetime mortgage these will also be examined in short detail.
Lump Sum Option
The lump sum option is the standard lifetime mortgage. Providers provide a mortgage with a one-time lump sum payment. These funds are tax free. As a mortgage there is interest that will roll up on the loan meaning it compounds on the loan until the mortgage is repaid in full. Repayment is not required until death or permanent residence is moved to long term care. Repayment incorporates the lump sum equity provided as well as the interest that has accrued.
By this definition any lifetime mortgage that offers a one-time payment is considered a lump sum lifetime mortgage such as interest only, enhanced and voluntary repayment plan. However, those three lifetime mortgages are discussed on a separate page with benefits and disadvantages because each has a different advantage from the standard lump sum. They are designed for special instances that might make them more appealing than the traditional lump sum. These products are mentioned here in the event the accrual of interest is not appealing to you, as a homeowner as well as if you need more funds than the standard lifetime mortgage can provide.
How it Works
Age and property value are used to determine the loan to value (LTV) percentage. Age determines life expectancy of the homeowner. For example a person of 55 may have 45 more years to live, while someone 85 may only have 15. The older a person is often the more a provider is willing to release as the lump sum knowing the repayment will be made earlier than someone who is younger.
Property value minimums are typically £70,000; however, each provider is different. Some may require more property value and there are a few who have required less in the past. The age and property value are calculated to determine the amount of funds, which is a percentage of the actual home value.
100% of the value is never provided, only a portion of the value to ensure that the accrual of interest will not exceed the current value of the home.
The Financial Conduct Authority and Equity Release Council have regulations in place called a ‘no negative equity’ clause. This clause states that a provider cannot take any asset beyond selling the home to repay the loan. For this reason and to adhere to the policy, providers make certain the LTV percentage is lower than full value based on interest that will accrue.
The main advantage of any lump sum lifetime mortgage is the funds provided to the homeowner which are tax free. A homeowner can have a comfortable retirement because they have enough funds to live on. What’s more, the funds can be used as the homeowner desires, which take away from the disadvantage of having to sell the home to repay the loan.