A lifetime mortgage is a financing option that most UK senior subjects avail in order to augment their limited income. It is a popular option that senior adults consider when looking to enjoy their golden years while their physical condition still allows them. Enjoyment here may include traveling or engaging in recreational activities, but without having to touch their “nest egg”, so to speak.
Unfortunately however, not all older adults resort to supplementing their pension or retirement money for enjoyment purposes. In fact, some do not even have enough money saved to even consider retiring at age 65. Although at that age, they can already draw benefits from Social Security. Still, additional costs of healthcare can easily deplete money set aside for a comfortable and secure life upon retirement.
Lifetime mortgage is a financing option that is available to older adults aged 55 or above, who at the same time, live in a property they own. Here, a senior borrows money based on a certain value of their equity on the property; but, without the usual requirement of making monthly payments. The arrangement entails deferring payment on the condition that the property will be sold upon the borrower’s death, or once it becomes necessary for him or her to move into a nursing home.
That being the case, only the residual and not the full value of the property will form part of the estate or legacy that he or she will leave behind to his heirs or beneficiaries.
Nonetheless, there are two types of approaches to choose from when borrowing money via a Lifetime Mortgage.
Two Types of Lifetime Mortgage for Seniors to Consider
When contemplating to obtain additional retirement funds by way of a Lifetime Mortgage, the first step to carry out is to determine the loanable amount against one’s equity on a real property. Since year 2019 is almost over, a better tool for computing the loanable amount is an equity release calculator 2020. That is because the calculator will factor in, the borrower’s actual age at the time the Lifetime Mortgage contract is signed.
Based on the amount calculated, a senior borrower can then choose between a Lump Sum or a Draw Down approach to taking out one’s equity. Keep in mind though, this special type of mortgage does not have a fixed term; because payment becomes due the moment the senior borrower passes away or enters a nursing facility.
More importantly, interest on the borrowed amount will be compounded monthly. The principal amount earns the lender, interest on a daily basis, which will then be added to the principal amount each month. This means on the following month and thereafter, the principal amount on which the interest will be computed, will be greater.
The longer the lifespan of a senior borrower, the greater the potential earnings of the Lifetime Mortgage lender. If so, there is a likely possibility for the loaned amount to balloon. The final amount due may even reach a value that equals or even exceeds the appreciated value of the property held under a Lifetime Mortgage.
That being the case, taking out the loanable amount by way of a Lump Sum approach, will grow the compounded interest much faster. Not unless, a lender gives the senior borrower the option to make monthly interest payments, as a way of curtailing the ballooning effect of compounded interests.
If the option is not available, a Draw Down facility is a better approach, since an elderly borrower can gradually take out the equity borrowing. That way, interests will compound and grow at a slower pace.