By Peter Harrison, Chartered Financial Planner, Manning and Company
Hot topic this –
you are short of cash, but have a valuable house with little or no mortgage left. Wouldn’t it
be a good idea to use the house as collateral for a loan? What could possibly
go wrong...?
Well, first of all the interest rate on a ‘lifetime mortgage’ could be
relatively high – usually between 6% and 7.5%. Since the rate is usually fixed
for life, the lenders need to take account of potential interest rate rises
long into the future. Then, of course,
with a bit of luck, you could live a very long time. Although you can pay
interest as you go, most people prefer to add interest to the loan which is
fine for a year or two, but can add up to a lot of money after 30 years. That’s
why this type of mortgage is more suitable for older people – perhaps 70+. On
the plus side, if property continues to appreciate in value (and, although
short term prospects are doubtful, supply and demand are likely to force prices
to increase substantially over the long term) the gap between the value of your
house and the mortgage outstanding, including the interest, should still ensure
a healthy inheritance for your children.
There is generally a ‘no negative equity’ guarantee – this means that
even if house values do not rise and the outstanding loan continues for a long
time, there will never be a further debt to pay when the loan is eventually
repaid.
Some people worry about set-up costs, and they can be fairly high. But
there are a lot of providers these days and they offer some competitive deals,
including free valuation and relatively low arrangement fees.
Of course, it makes sense to consider other options – perhaps a standard
mortgage if it is affordable, or borrowing from other sources. And, if all else
fails, moving to a smaller house may do the trick. It is also important to
check that the arrival of a large sum of money would not have an impact on any
benefits you may be receiving – council tax benefit for example.
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