Many homeowners could be sitting on a mortgage timebomb.
Endowment mortgages became popular around 30 years ago. They provided an interest only mortgage designed to be repaid with a savings product (an endowment savings plan) when the mortgage had run its term.
However, many people saw them as a way of cutting the cost of their home and made little or no effort to keep the savings element reviewed to track it was on target to return enough to repay the outstanding mortgage. The value of these plans typically depended on investment performance or allocation of with profit bonuses.
With those mortgages now having run their course, some people are faced through poor investment performance over the policy term, with the need to pay a large sum of money to their mortgage lender that they simply may not have, to repay the amount they have borrowed.
Your home may be repossessed if you do not keep up repayments on your mortgage.
If you are in that group, don’t panic. At Continuum, we have ways to defuse your interest only timebomb.
How your home can pay for itself
The industry estimates suggest there are many tens of thousands of pensioners with no savings in place which will allow them to repay their existing interest-only mortgages.
But the value of those properties themselves have shot up.
What you may need is a way to access the wealth your home has earned. But of course, selling up and downsizing might not be a very attractive prospect, even if it is possible.
Fortunately, there are solutions which can let you keep your home, deal with the outstanding mortgage, and in many cases even provide you with extra cash.
Retirement interest-only mortgages
Retirement interest-only mortgages are one answer. Their name explains it all – they are a new mortgage loan, which pays off your existing obligations.
Like your old loan, it is secured on the value of the property itself – but unlike your old loan, they have no end date. They will remain interest only.
This means there is no repayment term – the loan just keeps going until you die, or go to live in care, when it is paid off by selling the property. Any surplus is given to you or distributed to your beneficiaries.
Rates can be flexible, which could become a problem if interest rates were to go up significantly from their current historic lows – but it is also possible to opt for a fixed rate, which ties in the current low rates for the rest of your life.
The other solution is equity release. Equity release has become more popular in recent years, and there are several types of plan, but the most popular type of equity release schemes are lifetime mortgages.
You retain 100% ownership of your home, and receive a lump sum, which you can use to pay off your existing mortgage. But unlike the mortgage you used to buy the house in the first place, there are no payments to make.
However, compound interest is added to the lifetime mortgage loan throughout your lifetime. The loan plus interest is paid back when your home is sold which will usually happen when you move into long-term care, or when you and your partner die. Most Lifetime mortgage provider’s plans offer a no negative equity guarantee
You can typically release up to 50% of the value of your property with a lifetime mortgage, depending on your age. The older you are, the more generous providers are likely to be.
Depending on the capital growth your home has enjoyed since your bought it, you may have enough to pay off the mortgage and release some spare cash to boost your retirement plans. however this may potentially affect your entitlement to means tested state benefits
Defusing your personal timebomb
Which approach is right for you? Both types of scheme have disadvantages as well as advantages, and to understand which is the right solution to your mortgage timebomb, you must have professional advice, and a close look not just at your mortgage, but at all your financial arrangements. Tax, your retirement income – and what you will leave to your loved ones also all need to be taken into consideration.
At Continuum, we take an independent approach to the products that are available across the market and can work to find the answers that are best for you. It could mean not only that your mortgage timebomb does not go off – it could even leave you with a very useful cash bonus that you get to enjoy in your retirement without a mortgage to pay for.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to a suitable Equity Release product, you should seek independent financial advice before embarking on any course of action.
Equity release will reduce the value of your estate and may affect your entitlement to means tested state benefits.
A lifetime mortgage is a loan secured on your property.
The Financial Conduct Authority does not regulate taxation advice.
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