Family Building Society is offering pensioners a new way to access the money tied up in their home with its Retirement Lifestyle Booster mortgage. Is it a better option than equity release?
Retirement Lifestyle Booster mortgage: who is it for?
Family Building Society is offering a ‘Retirement Lifestyle Booster’ mortgage, which allows pensioners to take a fixed-income loan against the value of their home.
The product will be of interest to many pensioners, who find themselves asset-rich but cash poor thanks to the booming housing market.
Plenty of companies are already trying to cash-in on this need by offering equity release schemes, but now there is a new deal on the market.
Here’s everything you need to know about it.
What is a ‘Retirement Booster’ mortgage?
It’s a mortgage against your home that gives you an income.
But, unlike other equity release mortgages, you don’t get a large lump sum.
Instead you get a fixed monthly income.
Interest is deducted from the monthly payments, so when you get to then end of the loan term there should only be the initial sum you borrowed to pay back.
The idea is you will then either downsize, or sell your home, to clear the debt.
How does it work?
In order to be eligible for the Retirement Lifestyle Booster you must be aged between 60 and 79 and own your home, although it can still have a mortgage on it.
You can borrow up to 25% of the value of your home subject to a minimum loan of £60,000 if you own your home outright and £45,000 on a mortgaged property.
So, lets say your home is worth £240,000 and you borrow £60,000.
Family Building Society would then pay £500 a month into your nominated bank account for 10 years.
You’d pay monthly interest – which is deducted from your income payment – at a variable rate of 3.44%.
In this example that works out as a monthly cost of £83, leaving you with £417.
At the end of the 10 years you would owe £60,000 – the amount you’ve received in monthly payments.
Is it a better option than equity release?
The Retirement Lifestyle Booster has two big advantages over other equity release schemes.
Firstly, you get a guaranteed monthly income for a decade in retirement rather than a lump sum that, if mismanaged, could run out.
Secondly, the interest is calculated on what you have borrowed so far, rather than the whole sum you will borrow.
This could save you thousands of pounds when compared to a typical lump sum loan, where you pay interest on the full amount from day one.
Things to watch out for
There are two things potential borrowers need to consider very carefully.
Firstly, the interest rate isn’t fixed.
It could rise at any time, meaning your monthly income would shrink as Family Building Society would deduct a bigger payment.
It could also mean the loan ends up costing you a lot more if interest rates rise.
At the moment homeowners are enjoying record low interest rates, but that means there is only one way rates can go – up – and eventually they will.
The second issue is the fact, at the end of 10 years, you would have to find the money to repay the amount you’ve borrowed.
Family Building Society expect most people will do this by selling their home and moving somewhere cheaper.
But, you may not want to move, or might not be well enough.
It also means you could be forced to sell at a bad time in the housing market, leaving you with less money for another home.
Other equity release schemes allow you to stay in your home.