Information on loan model ERS | Equity Release Scheme

Loan Model ERS: Lifetime/reverse Mortgages

In a Lifetime Mortgage, a borrower continues to be the legal owner of the property, unlike the Home Reversion scheme. However, the lender takes a ‘first charge’ on it, thus securing the loan against the value of the property. There are two variations of Lifetime Mortgages. These are Roll-up Mortgages and Interest only Mortgages.

Roll-up Mortgages:

With a roll-up mortgage, a borrower makes no repayments and still continues to occupy and own the property. Each month, the borrower is charged an accrued interest on the borrowed funds as there are no regular repayments. Over time this results in an increasing amount of money owed by a borrower. The loan is usually paid out of the proceeds of the property when it is eventually sold due to the borrower’s passing away or his decision to move out. However, there is a possibility that one may end up with a negative equity at the sales date as property prices may not keep pace with an increasing amount of the outstanding loan (CCPC, 2016). To eliminate this risk for the consumer, providers may offer a no negative equity guarantee.

Interest-only mortgages:

In case of interest-only lifetime mortgages, a borrower pays monthly interest on the loan at a fixed or variable rate. Therefore the principal amount does not change over the term of the mortgage and the due repayment may appear manageable. Nonetheless the variable interest rate can increase the amount of monthly interest repayments. Some lifetime mortgages include the condition of repaying the loan within 30 years. The borrower has an option to repay a lifetime mortgage at any time from any funding source (CCPC, 2016). The table illustrates the advantages and drawbacks of lifetime mortgages.

Advantages	Drawbacks
A borrower can raise cash A borrower can raise cash through a lifetime mortgage and continue to own andoccupy the property.	With a roll-up mortgage, a borrower makes no repayments and as a result thereof, interest obligations build up swiftly. The longer the borrower lives, the higher will be the probability that the amount he/she owes comes close to the value of the property.
A borrower benefits from any increase in property prices.	A large amount may have to be repaid when the property is sold, which is due to the interest built up during a borrower’s lifetime. Hence less (or no) money could remain for the financing one’s long term care or for one’s heirs.
Firms providing these products must comply with the prevailing consumer credit law. Providers and advisors must also comply with the requirements of the consumer protection code of firms’ behavior.	If interest rates rise, interest obligations for a variable-rate roll-up mortgage will increase. This increases an outstanding amount further. It will also affect a borrower’s monthly repayment sum with possibly detrimental effects on his/her repayment capability.