I owe, I owe, I owe!
Posted on 27th February 2020 at 12:00
Up to now we’ve covered the confusion of the Equity Release name (LLL) and what the money can be used for. Now we are going to cover some of the financial aspects with what you would owe, when the mortgage gets repaid and ways to limit the growing amount owed.
Most people taking out LLL don’t make any repayments and therefore the monthly interest is compounded. Compounding is where interest is added to interest and the amount grows. You borrow £10,000 and the interest for the first month is £50. You make no payments at all, so you now owe £10,050. The interest at the end of the second month is based on £10,050 and added to that amount and so the same happens each month.
How much will I owe? This will all depend on the interest rates at the time the mortgage was taken out. The main point to understand about LLL is how the amount you owe grows over time. This is all down to compounded interest.
The interest rate on the LLL mortgage is fixed for the life of the mortgage – it doesn’t go up or down.
When you discuss LLL with a qualified advisor, they will show you rough projections on what you will owe year on year. As the years pass, the amount owed can grow substantially depending on the initial amount borrowed and the interest rate.
Remember, under the current LLL schemes, most lenders offer a ‘no negative equity guarantee’. This means you will never owe more than the value of your home. If your mortgage debt exceeds the value of your home, that additional cost is absorbed by the lender (not the borrower). Historically this didn’t happen – in some cases beneficiaries were left with additional debts to settle.
When will my mortgage be repaid ? If the mortgage is in joint names, then it’s when the last survivor either passes away or permanently enters a care home. The property is then sold, the mortgage is repaid and what money is left is either passed through to your estate (for distribution as defined in your will) or to support care home fees.
Can I control the amount that is owed at the end ? Yes you can. Many LLL mortgages allow for ad-hoc payments to be made. These can vary in minimum amounts and regularity. Some allow a minimum of £500 and only 4 payments per year, some allow £50 and unlimited payments per year. Some allow for regular monthly payments with the amount being your choice. By making these payments it will reduce the way and amount of interest being compounded and hence lower the amount needing to be repaid at the very end – lots to think about and consider.
Remember, these ad-hoc payments don’t always need to come from those who are on the mortgage. There is nothing stopping family members contributing if they so wish and remember, there is no formal commitment needed for this.
If any of this is of interest to you and you’d like a no obligation informal conversation with a qualified advisor, please get in touch on 07788 219647 or email john.stallan@hdconsultants.net
Next time, we’ll cover what happens if you want to move house and you already have a LLL mortgage.
Tagged as: Equity Release
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