Roll-Up Mortgage and Negative-Equity

With a Roll-up mortgage it is still possible, especially if you live a long time, for the amount that you few on your loan to be more than the value of your home. This is so called negative equity.

Because there is no standard type of Equity Release package lenders all have different policies to the negative equity effect. Some may ask you to start paying the interest on the loan while others may charge your beneficiaries the extra interest bill after your death. Clearly these sorts of critical questions must be asked and understood before any policy is signed.

But there are ways to protect yourself from the effects of negative-equity. Some equity release providers, notably those whose schemes are SHIP (see below for more details) approved, offer a no negative equity guarantee.

• This guarantee means that both you and your beneficiaries will never have to pay more than the value of your home should it fall through the negative-equity trapdoor
  
  
• This is excellent news and sets today's Equity Release schemes apart from the plans originating in the early 1990s. Much controversy originates from the Equity Release of old especially relating to the effect of negative equity

Safe Home Income Plans (SHIP) is an organisation supported by the leading providers of Home Income and Equity Release plans. It was launched in 1991 and is dedicated to the protection of those who take out an Equity Release plan. More details on SHIP.

What Is a Drawdown Mortgage

A Drawdown mortgage comes under the same umbrella as a Roll Up mortgage.

• Instead of taking a cash lump sum in the beginning, a smaller cash amount is taken with the option of drawing down more cash either when needed, or regularly perhaps monthly or quarterly
  
  
• Perhaps you agree to borrow £50,000 but want just £15,000 now to cover certain expenses
  
  
• You still have the potential to withdraw another £35,000 in the future
  
  
• And this is the important point – interest is charged only on the initial £15,000 drawdown not the full £50,000. Of course as you drawdown more of the available balance interest is then charged on this amount
  
  
• Like a Roll-up mortgage the total loan is repaid when the house is sold

What is a Shared Appreciation Mortgages ( SAM)

There is also a product on the market called a Shared Appreciation Mortgage, SAM for short. Again a cash lump sum is paid out which is secured on the property but interest is either waived on the loan or is paid at a reduced rate.

The lender will then make an agreement to share part of the potential increase in the value of the property.

For example:

• You take out a shared appreciation mortgage of £30,000 and receive a cash lump sum
  
  
• No interest is charged by the lender and you don't have to pay back any of the principal while you are alive
  
  
• But when you die, or the house is sold the lender is repaid the loan principal of £30,000 alongside a percentage of the property's gain for example 50%.

If the property was originally worth £100,000 but is worth £150,000 when sold then the lender would receive the £30,000 loan principal plus 50% of the increase or £25,000. The balance of £95,000 would go to the beneficiaries.