Interest-only lifetime mortgages
If you’re concerned about interest rolling up on your equity release plan, you may be keen to learn more about interest-only lifetime mortgages.
What is an Interest-only Lifetime Mortgage?
An interest-only mortgage allows you to make monthly interest payments. If you are able to do this for the life of your plan, there won’t be any extra balance to repay when it ends – only the amount first borrowed.
If you have a good surplus income and would rather service the interest charged on your lifetime mortgage and avoid it rolling up, this type of plan could be one of the best ways to retain as much equity in your property as possible – maximising the inheritance you leave.
These type of plans are popular with people who cannot get a traditional mortgage in retirement, as in reality they work in the same way as a residential interest-only mortgage.
How does an interest-only lifetime mortgage work?
Interest-only lifetime mortgages are based on the same set of principles as standard lifetime mortgages. This means that the lender will expect you to be aged 55 or over and own a property worth at least £70,000.
The loan-to-valuation formula is based on the age of the youngest applicant and the market value of your property. Therefore, the older the homeowner is, the more equity they can release, as their life expectancy is reduced.
This would seem contrary to the needs of an interest-only plan, however there are features within some of these plans that allow you to switch to a roll-up plan at a later stage, which acts as a safeguard.
Find out how much you can borrow with our interest-only calculator.
How much do I have to repay monthly with an interest-only lifetime mortgage?
Interest-only lifetime mortgage lenders historically were required to ensure affordability and therefore required proof of income. However, the FCA has changed this ruling, meaning interest-only lifetime mortgages do not require income or affordability checks.
The unique features of these plans mean the level of interest repaid back to the lender can be determined by you, the homeowner – as long as the terms and conditions of the plan are being met.
You can also select your level of contribution. Help and guidance from your local adviser helps, as this decision affects your inheritance in the future.
Contributions depend on factors such as your income, how much inheritance you want to leave, and the size of the loan taken. This monthly contribution is paid by direct debit.
If the payment selected is lower than the interest charged, there will be an element of ‘roll-up’. However, this will be lower than if no payments were made at all.
The most popular route for interest-only lifetime mortgages is to fully repay the interest each month, thereby maintaining a level mortgage balance.
Can I still obtain a mortgage in retirement?
Yes. Many people requiring retirement lending have previously found it difficult to obtain finance on the grounds of their age. While lenders are starting to address these issues, there still seems much prejudice against lending into retirement.
However, lifetime mortgages have bucked this trend by introducing equity release schemes where age is no barrier, allowing borrowing from age 55 to beyond age 90. Using a sensible lending approach and flexible features reflecting the possible changing fortunes in retirement, such as health and lifestyle, these plans offer a great opportunity to raise finance in your later years.
What are the disadvantages of interest-only lifetime mortgages?
- If you pay your equity release interest-only mortgage off early, you could incur substantial penalties.
- Taking equity from your property will reduce the inheritance you pass onto your beneficiaries.
- If monthly repayments aren’t maintained, your mortgage balance will increase.
- Taking too much initial equity can affect means-tested benefits, thus professional advice should be sought.
These are interest only lifetime mortgage schemes. To understand their features, benefits and risks, please contact Equity Release Supermarket for a personalised key facts Illustration. All interest only quotes can be tailored to your own circumstances and you are under no obligation to proceed.