Lump sum mortgages, otherwise known as equity release, allow you to extract one large lump sum from your home.
For many homeowners in the UK over the age of 55, a lump sum mortgage provides a very useful injection of income. The main advantage is that it is completely tax-free and you can continue to live in your home until you die or go into long term care. You are simply charged interest at around 5% APR, either monthly or rolled up until the end.
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Homeowners can borrow between 35% to 50% of their property’s value through a lump sum mortgage. This is because it falls under a lifetime mortgage where you still retain 100% ownership in your property. If you are willing to give up a stake in your home or flat, you can look at home reversion plans where you can release between 50% and 100% of your property, but it means that you are selling a large stake of this to your provider.
The amount you can release is based on your property’s value, health and age of the youngest homeowner. It is perfectly acceptable to still be paying off your mortgage, as this is common for most equity release products.
Your borrowing facility is based on a loan-to-value, with the older the applicant, the more they can typically borrow.
A fixed interest rate is charged by the lender according to your particular plan. As the borrower, you have the choice to make monthly repayments or you can choose for the interest to be compounded over time and added to the overall balance, which is recovered upon the eventual sale of your property.
The scheme is repaid in full when the last homeowner has died or moved into long-term care. The mortgage provider will take their share of the property when it has been sold on the open market, and all other funds will be passed onto your estate. Using a lump sum mortgage will still give your children an inheritance, however, this will be slightly less since the mortgage provider has to take their fees and recover the funds from the initial lump sum.
Lump sum mortgages offer an important source of cash for seniors and those approaching their later years.
More than half of homeowners use the funds towards home improvements, whether it is making the property more suitable for senior living such as adding stair lifts, ramps and easily accessible facilities.
Debt consolidation is a popular use for lump sum equity release plans, where the funds are used to pay off any outstanding debts including credit card bills, car payments, personal loans and more.
Gifting has become a much more common reason for taking out lump sum loans, such as giving large sums of money to children to get on the property ladder, pay for school fees or a new car.
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