- February 22, 2018
A lump sum scheme is perhaps the simplest and most straightforward of all lifetime mortgage plans. It doesn’t offer a lot in the way of extra features or enhancements but because of that, you often benefit from a lower interest rate and a higher lump sum payment. If you want to take a one-time cash payment and you want to keep your interest rate low, a lump sum mortgage scheme might be the right option for you.
How does a Lump Sum Mortgage work?
To access the equity built up on your home using a lump sum scheme, you simply take out a loan against your property in exchange for a one-time cash payment. That lump sum payment is tax-free and can be spent however you want.
The interest rate on a lump sum scheme will be fixed and you likely won’t have any requirement that forces you to pay monthly payments over the course of the loan. If you do want to make payments, there may also be options available for that. However, a traditional lump sum mortgage scheme does not involve making any repayments.
The loan amount, including the original amount borrowed and all interest that has accrued, is repaid when the home is sold. That sale takes place when you, or the last remaining homeowner, either move into long term care or pass away. With this plan, if no repayments are made, the interest simply rolls up, or compounds. This means that the balance is always increasing.
How much can I borrow?
One of the most important considerations when thinking about a lump sum mortgage scheme is determining how much money you’ll need throughout retirement. Given that this is a one-time payment, you want to be sure you choose an amount that will provide for all of your needs during retirement without having to access more cash.
The amount that you’ll be allowed to borrow will depend on a few factors. These include the value of the property and the age of the youngest homeowner. Generally speaking, the older the youngest borrower is, the more equity that can be released. Again, you want to bear in mind that just because you are allowed to take out a certain amount does not mean it is advisable to take all of it. If you are unsure how much you should borrow, you can reach out to one of our trusted advisers for guidance.
If you find that you do not take out enough money, despite being deliberate and thoughtful about the amount needed, you may be able to take more in the future. Some equity release providers will consider additional releases if you have put your original release to good use. Those additional releases would be subject to the loan terms applicable at that time. A new calculation would be performed to see if extra money would be available to you. The minimum amount allowed for additional releases is usually £5,000 and you would likely incur additional costs associated with setup and administration of those additional withdrawals.
Perhaps the biggest consideration when it comes to this particular equity release scheme is that it will very much limit your ability to leave behind an inheritance to your loved ones. Given that no repayments are required, and the interest simply compounds over time, the loan balance will continuously grow. This means that when it comes time to sell the home, the loan will likely be a sizeable amount. If there is nothing left over from the sale of the home after the debt has been paid, there will be no proceeds left over for an inheritance.
There are benefits to all equity release schemes, but with a lump sum mortgage, you are almost guaranteed a better interest rate given that this scheme does not come with a lot of additional features. Because with this scheme you don’t need a drawdown facility or the administration of repayments, the provider passes on their savings to you in the way of a lower interest rate and a higher lump sum.
With this plan, like other lifetime mortgage plans, you have the benefit of using the cash however you see fit and you can stay living in your home all while retaining full ownership.
To discuss all of the benefits and potential risks associated with a lump sum mortgage scheme, please reach out to us for a full evaluation. You can contact us below by phone, email or via live chat.