Home Income Plans
This type of lifetime mortgage is very similar to an equity release plan. In fact, they are so similar that many home income plans are expressed as being equity release schemes by lenders.
In brief, the property and the value within the property is utilised as security to borrow one large lump sum. This lump sum is then invested into an annuity plan which produces sufficient monthly income firstly to pay the interest on the loan and secondly to pay the borrower an income.
When the property is sold or the borrower dies, the capital amount of the loan is repaid from the proceeds of the property sale. One of the main criticisms levelled at this type of mortgage is that the amount of income generated from an annuity is normally incredibly low, particularly if spread over several decades. In order to gain a notable income, it would normally be necessary to be looking at an annuity of less than ten years, making this a more popular choice for older individuals over the age of approximately 80 years old, who are aiming to enhance their pension income.
Shared Appreciation Mortgage
A variant on this type of mortgage is the shared appreciation mortgage. This works in exactly the same way as the home income plan type of mortgage in that a lump sum is obtained and a regular monthly income obtained through the use of an annuity product. The difference is that the interest is either lower or non-existent as the lender will enjoy an agreed percentage of the rise in the equity value of the property.
Consider, for example, a £100,000 property and a shared appreciation mortgage of £25,000. Interest may be waived in exchange for a 50% interest in the equity rise. When the property is sold, ten years later, the property is worth £180,000. The initial £25,000 is repayable but the lender will also be entitled to £40,000 of the sale proceeds which is 50% of the rise of £80,000. The balancing £115,000 would then form part of the estate and the borrower would have enjoyed a regular monthly income from the mortgage for the ten-year period.