A feature that has revolutionised later life mortgages. Voluntary payments allow you to repay upto 10%-15% of the initial amount borrowed each year, without penalty. It's available on many lump sum, drawdown and interest-only lifetime mortgages and gives real flexibility to manage the balance of your lifetime mortgage.
Another safety feature is that most lifetime mortgages offer fixed interest rates for life. Rates have fallen significantly in recent years (many are now under 4% APR), which makes a lifetime mortgage with the voluntary repayments feature an affordable and realistic alternative to a residential mortgage in retirement.
Importantly, lenders don't assess income and expenditure using ‘affordability’ criteria. Hence, voluntary payment mortgages could be an ideal solution if you wish to continue a mortgage into retirement and maintain some form of payment – one that your bank or building society may not previously allowed you to do so.
Additionally, with voluntary payment plans you don’t have to worry about remortgaging every few years with the added expense that brings. With a lifetime mortgage, your home can't be repossessed for non-payment, which could happen with a residential retirement mortgage if you fail to make your monthly repayments.
How you make your voluntary payments is entirely up to you, but there are 3 approaches you could take depending upon which type of lifetime mortgage you are making the voluntary payments on.
With an interest-only lifetime mortgage. Here you repay the interest accruing on your plan every month, so only the initial amount borrowed is all that needs to be repaid. By making extra voluntary payments this balance could be reduced, or even repaid in full over a number of years.
With a lump sum or drawdown lifetime mortgage. By making voluntary partial payments upto the 10%-15% maximum allowed each year, your lifetime mortgage could actually be repaid in under 18 years when interest rates are 4% or less (rule of 72).
It’s worth mentioning that some lenders ‘collar’ the balance of your loan at £10,000 and if it reduces below that, then early repayment charges may be payable.
Ad-hoc repayments.You can make voluntary repayments as and when you want to. Some lenders will allow you repay from just £50 and make unlimited repayments each year without penalty. While this approach won’t repay your lifetime mortgage, it will help to reduce the interest accruing and manage the final settlement.
Our voluntary partial payment calculator above illustrates the effect making voluntary repayments could have on your future balance and potentially how much money you could save your estate and your beneficiaries.
Voluntary payment plans don't need to pass lender’s affordability assessments, or the costs associated with remortgaging every few years. Hence, voluntary plans could be beneficial if you've missed any mortgage payments and your credit file has been affected.
Lenders do not charge any extra fees when making voluntary repayments upto an annual allowance of between 10%-15%.
The money you receive is tax-free, you continue to own 100% of your property, you receive a ‘no negative equity’ guarantee and you could still take advantage of ‘Guaranteed Inheritance’ or ‘Downsizing Protection’ features.
Taking advantage of the generous yearly voluntary payment allowance the more you will repay off the balance of your lifetime mortgage. Ultimately, this will leave more in your estate and for your beneficiaries.
Lenders can impose restrictions on how many payments can be made each year, and when they start. For instance, they may only allow a maximum of 4 payments yearly and some will only allow payments to start 12 months after inception of the plan. Additionally, some also won’t allow a voluntary payment to be made within 12 months of a drawdown payment being taken.
Some lenders may put a minimum balance ‘collar’ on your lifetime mortgage. This is the minimum outstanding balance you must have when your plan comes to an end. If you breach this, you could incur early repayment charges.
You can only take advantage of voluntary repayment lifetime mortgages if you have enough ‘spare money’ to make repayments and so you should consider if they really are a viable option.
If you choose a lump sum or drawdown lifetime mortgage and then don’t make any voluntary repayments, the interest repayable on your loan will increase over time - potentially leaving you with little or no inheritance.