Unlike a standard lifetime mortgage where the interest rolls-up and the balance increases, a typical interest only plan requires payment of the interest charged by the lender on a monthly basis. This results in the mortgage balance remaining the same throughout the entire term of the loan, with only the initial amount borrowed to be repaid when your plan ends.
Payment flexibility is also enhanced by voluntary partial payments, where you can repay upto 10%-15%pa of the amount borrowed. So, funds permitting, you could completely repay your lifetime mortgage with no penalty using voluntary payments. Finally, if you wish to stop making monthly interest payments you can - simply allow the interest to accrue and repay it when your plan ends.
Interest only plans can vary in nature - some will even allow you to choose your level of monthly payment. This could be to suit budget. For instance it could be a contribution less than the interest charged - thus the balance increases, albeit less than if no payments are made. Conversely, payments you make could be higher than the interest charged, resulting in the balance reducing over time - similar to a capital and interest residential mortgage.
No income or affordability assessments are required by lenders, therefore interest only lifetime mortgages are ideal if you've been declined a mortgage, where your mortgage needs repaying, or extending into retirement. You also have the peace of mind of knowing that your home cannot be repossessed through missed mortgage repayments, plus your plan comes with a ‘no negative equity’ guarantee, offering further protection for your beneficiaries.
The maximum amount you can borrow on an interest only lifetime mortgage is mainly determined by the age of the youngest homeowner and the current value of the property. However, there are also lenders that will lower the interest rate the greater the amount of repayment you are making. Hence, why it's always important to discuss your options with your local adviser.
Your age is important because the older you are, the more you can borrow with an interest only lifetime mortgage. Plans starting at age 55 typically have a 25% loan-to-value, rising upto a maximum borrowing capacity of 56% of the value of your property by the time your in your mid-80’s. As a rule, we'd only recommend taking the amount what you actually need as your initial loan.
As monthly interest only payments are being made, only the initial amount borrowed will be repaid when your plan ends. This will therefore be a lower balance than that of a roll-up scheme.
These plans have all the features of a residential mortgage, plus more flexibility. Choose any payment upto 100% of the interest charged, all the interest, or even extra voluntary payments - upto 10%-15% of the original amount borrowed yearly. This effectively makes them manageable as both interest only or capital and interest mortgages, with no proof of income required.
You'll know exactly what your monthly interest payments are both now and in the future, enabling you to budget with confidence.
If you want to stop making interest payments at any time in the future and switch to a ‘roll up’ interest plan, you can with no penalty. Some lenders will still allow ad-hoc voluntary payments.
Depending on the lenders criteria, you may be able to take additional borrowing, if the need arises in the future. This would be based on updating your personal criteria such as current age, property value and the outstanding balance at the time.
And yours to spend as you wish – a common feature of all lifetime mortgages.
You remain the legal owner of the property – a common feature of all lifetime mortgages, allowing you to benefit if the value of your home increases in the future.
Meeting Equity Release Council gudelines, you have the peace of mind knowing that when your plan is finally repaid, your loved ones will never be out of pocket.
An interest only lifetime mortgage will typically allow you to borrow upto around 38% of the value of your home at age 65. So, if you have a mortgage with a high loan-to-value, you may not be able to borrow enough to repay it completely and ‘substitute’ with an interest only lifetime mortgage.
As you are receiving a cash lump sum, any current/future means-tested benefits claimed may be affected. Your adviser would always do a benefits check before making any recommendation.
As lifetime mortgages are designed for the long term, if you repaid your lump sum lifetime mortgage early, you may be subject to a penalty. These early repayment charges could be as high as 25% of the amount borrowed, however depending on your equity release lender they could also taper over a fixed number of years..
Stopping any interest only payments will result in the interest instead being added to the loan and compounding over the remainder of the loan. Therefore, the balance may otherwise be higher than originally anticipated.
Releasing equity from your property, even via an interest only lifetime mortgage will still reduce your overall estate by the amount of the original loan.