The lump sum mortgage scheme is the core product of lifetime mortgages. It is straightforward, easy to understand, and does not come with a lot of bells and whistles. Because it is a basic plan, you are often rewarded with a lower interest rate than with other schemes that have several features and options available.

With a lump sum scheme, you take out a loan secured against your property. You receive a one-time tax-free lump sum and can spend the cash however you want.

The fixed interest on this scheme rolls-up and compounds. Both the interest and the capital are due when the home is sold, which takes place either when you pass away or move into long-term care. With this plan, you do not make any repayments against your loan balance. As such, the balance due when the house is sold can be much higher than the original amount borrowed, given the interest roll-up.

The foundation of this plan is that you receive just one lump sum payment, but some providers will allow you to receive additional releases, if needed and if you put your original release to good use. Those future releases would be subject to the loan terms at that time, which may be different than those applied when you first received your original cash payment. In most cases, the minimum amount for a future release is £5,000 and you would likely incur setup costs for that release.

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Advantages of Lump Sum Mortgages

There are many advantages to a lump sum mortgage. To start, because the plan is so basic you are likely going to receive a better interest rate than with a plan that offers a lot of different options. The equity release provider is saving on cost by not having to administer a drawdown facility or deal with repayments. So, the savings are passed on to you in the way of a lower interest rate.

In addition, as is the case with other lifetime mortgage products, you receive your cash and can spend it however you want. There are no restrictions so you can take the vacation you always wanted or buy the car you could never afford before. Gift some cash to loved ones or pay down existing debt. The options are limitless, and you decide how you spend the money.

Another advantage is that you get to stay living in your home while retaining full ownership of it and you do not have to make any rent payments. Also, with a lump sum scheme, you do not have to many repayments against the loan. This is the biggest selling point for many homeowners considering this scheme. You don’t have to worry about budgeting in any repayments while you are still alive and living in the home.

Disadvantages of Lump Sum Mortgages

The biggest disadvantage of lump sum mortgage schemes is that you will feel the impact of interest roll-up. While the interest rate is fixed and can be lower than other plans, you are just allowing the interest to compound with this type of plan. So, your balance will be must higher when the debt is due. Because of that, it can be much harder to leave an inheritance to loved ones when you use this plan. There just is not always a lot of money left over from the sale of your home once the lender has been paid back.

With other plans that allow or encourage repayments, you can have some control over the balance that will come due once your home is sold. With this plan, while you get to enjoy not having to make any repayments, your balance just continues to grow.

Finally, lump sum plans can impact your means-tested benefits given that you are only going to receive one larger payment. With some other plans, like the drawdown option, there are sometimes strategic ways to avoid any impact on your means-tested benefits. With this scheme, avoiding an impact is much more challenging given that you are receiving your full equity release in one payment.

To discuss all advantages and disadvantages of a lump sum lifetime mortgage plan, we encourage you to speak with a local equity release expert.