Roll-Up Lifetime Mortgages
A roll-up lifetime mortgage is similar to a standard mortgage in that it is a loan secured on the property. With a roll-up mortgage the borrower makes no payments either in terms of interest or repayment and the amount of the loan simply rolls up and is settled at the point when the property is sold or the borrower dies.
One of the main issues to bear in mind with this type of mortgage is that the interest will accumulate. This means that every month more is added on to the total at an increasing rate to take account of the interest from the previous months being added to the total amount. Due to the nature of this type of loan, most lenders will only agree to lend a very small percentage of the property value. This is because the lender will want to be certain that when the point of sale is reached, the price obtained from the property will amply cover the total of the roll-up mortgage.
The best way to understand a roll-up mortgage is to consider an example. A mortgage of around £40,000 at an interest rate of approximately 6.9% will mean that the capital amount due ten years later will be nearly double and can increase three-fold within twenty years. Bear in mind that although these numbers may look quite weak, they do not take into account the rise in property prices. Based on the last twenty years, these figures would still result in more than £100,000 equity in the property.
Watch For negative Equity
Anyone considering a roll-up mortgage needs to think carefully about the potential of negative equity. If property prices do not rise at the same rate as the mortgage value increases when the property is sold, the borrower will be left with a negative balance, when it comes to settling the loan.
With a roll-up mortgage, the lender will keep a close eye on the value of the property and may have a set procedure for dealing with this eventuality. Make sure that you understand the procedures that your particular lender will invoke if this situation arises. Commonly, roll-up mortgage lenders will begin to charge monthly interest which will be payable to ensure that the size of the loan does not exceed the value of the property.