A lump sum mortgage scheme is best for the homeowner who wants to receive just one large cash payment. This type of plan is essentially the core of the lifetime mortgage series of products and is the plan on which all others were built. There are very few features offered with this plan making it very straightforward and easy to understand with very simple functionality. In exchange for that simplicity, you are likely to receive a lower interest rate than you would with more complicated plans. You may also be in a position to receive a higher cash sum.
How does a Lump Sum Plan Function?
If considering a lump sum plan, you should first know how much cash you need to release from your home to meet your financial obligations. For many homeowners, equity release products allow them to take a nice vacation, pay down debt, or gift cash to loved ones while they can still watch them enjoy it. Knowing how much cash you need is an important first step with a lump sum plan because you are likely to only get one payment. You want to make sure you get enough since there isn’t always an option to withdraw future funds.
With this scheme, you simply take out a loan against your property in exchange for a one-time lump sum cash payment. You aren’t taxed on the payment you receive, and you can spend it however you want. You’ll get a fixed interest rate with your loan and usually there are no repayments required. You may be able to make repayments if you so choose but this plan does not usually require them. Because more often than not no payments are made, the balance continues to accrue interest that compounds over time, resulting in a much higher balance when the loan is finally repaid.
The full balance of the debt is repaid when the home is sold. This typically happens when the final homeowner has either passed away or moved into long-term care. One major consideration with this type of plan is that due to the interest roll-up, there can be a substantial impact to any potential inheritance. The loan can simply be much bigger when it comes time to pay it back, which might not leave a lot of money leftover for loved ones.
How much can be borrowed?
There are a few factors that determine how much equity can be released using a lump sum scheme. The calculation is based largely on the age of the youngest homeowner and the property value. Generally speaking, you can borrow more the older you are.
We offer calculators that allow you to plug in your information to determine how much you’d likely be able to release. While you can find out how much you can likely borrow, you want to make sure you know how much you should borrow, which can be a different amount. The more you take out, the more you will have to pay back when the house is sold and the more interest you will accrue along the way. We always suggest that homeowners considering any equity release scheme speak with a trusted adviser that can help determine the best plan for their unique situation. If you are considering a lump sum plan, it is important to consider how much money you need. If you choose to take out more than you actually need, you will end up paying interest on money you are not even spending, which can just be very costly.
With some lump sum plans, there is an option to release additional funds in the future. Those funds are typically released in increments of £5,000 but require you to pay additional fees for set up.
There are many benefits to a lump sum lifetime mortgage scheme. The biggest of these is that you will likely receive a favorable interest rate, since these plans don’t offer the features and options that many other lifetime mortgage plans offer. Because of that, the lender can pass down some of those savings to you.
These plans also allow you to know right at the start how much money you have to work with during retirement. You only get one payment in most instances so you can budget accordingly.