My Father-in-law is considering taking out a lifetime mortgage in order to purchase a bungalow that is of slightly higher value than their current property. I am instinctively cautious and sceptical when it comes to this sort of thing.

My understanding is that:

- Nothing is payable in their lifetime, but interest rates are at around 4%, and this compounds until payment is due.
- Payment is due upon death or upon going into permenant care.
- most lifetime mortgages come with negative equity protection.

Do any members have any experience of this kind of product?

Are they legit, or are they just another way to rip off older people?

Is there anything I'm missing?

My thoughts are that, even with the compounding interest on the mortgage, if house prices continue to go up with inflation, the overall cost shouldn't be massive, and it may be a way for them to acquire a property that will be more suitable for them in their old age. But I'd appreciate any input from members.

I'm instinctively cautious on this sort of thing as well. I have no experience of it but there are some perhaps obvious things to ponder.
Presumably your father-in-law will have to sell one bungalow and buy another and incur the transactional costs. Inevitably the new bungalow will require some perhaps unforeseen expenditures.
Presumably he will only be taking out a mortgage to cover the additional price of the new property. Obviously the smaller this is the better.
Will his existing bungalow sell relatively quickly and is he reasonably confident he will get his asking price?
Is the 4% fixed?
4% seems high to me.
Is the disruption really worth it given their age?

This seems to stack-up reasonably well.
I once got a loan FROM my father-in-law. He had a legal contract drawn up and he charged me a low rate of interest.

I would say try and think this one through as a family.

I know it can be very challenging because an older generation can want to continue making all their own decisions without discussion with their offspring. People want to continue to believe they are independent, fully knowledgeable and aware, and can make the best decisions without input from anybody else. And indeed can want to make decisions impacting other younger family members without seeing a reason to consult those younger people (youth always equalling less wise even to an 80 year old with a 55 year old child). But in my view there are many cases where a family can do better to work together financially rather than acting solely individually - if they have the maturity to do so.

I would be very wary about all the details of an equity release contract. When the property rises in value does the debt also rise proportionately. E.g. You always owe 10% of the property value, so you borrow 30k, the house doubles over the next 15 years and you then owe 60k plus 15 years of compound interest as well. The salesman is perhaps likely to approach the father at least once a year offering to release more equity in a special time limited offer, and at some point he may succumb to afford a treat or a knee operation without waiting, or a shiny brand new car, or just through becoming senile. Then after 15 years you find the loan company own 60% of the property. There may also be considerable admin fees, closure fees, review fees, repayment fees etc etc.

You can get a ten year fixed rate mortgage today for maybe 2.2%. So this gives an annual mortgage interest charge of just £660 pa on a £30k loan. I think it would seem odd if the family couldn’t stump up £55 a month between them to cover the mortgage interest, and indeed perhaps worrying that your father’s budget is so tight he cant afford £660 on interest payments. Likely cheaper to loan your father the money with a formal loan document as already suggested above.

I would also be inclined to seek some involvement in the property sale. Older people can be too willing to take less than the going rate because they want to avoid stress, hassle etc. But it does them no good if they lose £20k or £30k on their sale in a desperate attempt to ensure they get what they may see as ‘the only bungalow in the world’.