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.