Thinking about the future With a lifetime mortgage, interest is added to the loan until it’s repaid. If you choose not to make any payments towards the balance, your remaining property equity will reduce quickly. For example, in the scenario above, the customer has over £188,000 in property equity after three years. But that reduces to less than £77,000 by year 15. And by year 20, the customer has no property equity remaining – although the customer will never owe more than their home's worth as a result of the no negative equity guarantee. By not making payments towards your lifetime mortgage, you not only reduce the value of your estate, but also restrict your financial options in the future; with less equity to draw from should you need it. With that in mind, it’s important to consider both your current and long-term needs and circumstances before choosing whether to go ahead with equity release. And if you decide a lifetime mortgage is right for you, it’s always recommended to make payments towards your loan to help reduce the impact of compound interest. You can read more about how to reduce the cost of your lifetime mortgage on page 22.
The table shows the impact compound interest has on a lifetime mortgage if you choose not to make repayments. In this scenario, the customer has released £82,475 from their £288,000 home. Their lifetime mortgage accrues £5,349 of interest in the first year. In year 2, as interest is charged on the outstanding balance (£87,824), not the initial loan amount (£82,475), £5,695 is accrued in interest – £346 more than in year 1. In year 3, £6,065 is added in interest – £370 more than in year 2 and £716 more than in year 1. This cycle then continues for the life of the plan, which is usually until you or the last remaining applicant passes away or moves into long-term care.
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