Interest Only Lifetime Mortgage
An interest only lifetime mortgage helps to release equity your property, but rather than rolling-up, the balance remains level due to the requirement to make monthly interest only payments. These schemes are popular for protecting future inheritance concerns.
Lifetime interest only mortgages have played an important role in assisting homeowners near, or in retirement to raise tax-free cash during a post Mortgage Market Review (MMR) era. When mainstream mortgage lenders were denying lending into retirement, it has been this type of equity release mortgage that has helped their plight by offering a sensible and flexible interest only lifetime mortgage for pensioners.
How Does an Interest Only Lifetime Mortgage Work?These home equity release schemes are based on the same set of principles as standard lifetime mortgages with a minimum age of 55. The loan-to-valuation formula is based on the age of the youngest applicant and the market value of the property. The amount of equity released increases the older the homeowners become, due to their reducing life expectancy period. This would seem contrary to the needs of an interest-only plan, however there are features within these plans that allow a switch to a roll-up plan at a later stage.
Interest only lifetime mortgage providers are now required to ensure affordability and therefore will require proof of income in most cases. However, the unique features of these plans means the level of interest repaid back to the lender can be determined by the homeowner. Dependent on factors such as pension income, inheritance retained & size of loan taken, you can select your level of contribution. This must be proven to be affordable using bank statements and P60’s, with payments usually made by monthly direct debit.
If the contribution level selected is lower than the interest charged, there will be an element of roll-up, albeit slower than if no payments were made at all. The most popular route for interest only lifetime mortgagees is to fully repay the interest each month, thereby maintaining a static mortgage balance. This is ideal for those with good surplus pension incomes who would rather service the interest charged than it rolling up, thereby retaining as much home equity in their property as possible.
Can I Still Obtain A Mortgage In Retirement?Many people requiring retirement lending have previously found it difficult to obtain finance on the grounds of age. Although lenders are starting to address such 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 between the ages of 55 to upwards of 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 older age.
Advantages of Interest Only Lifetime Mortgages
- Interest rates are fixed for life, so are monthly payments & future affordability secured in advance
- By continually repaying the interest each month will help maintain a constantly level mortgage balance
- 100% of the property is retained along with any escalation in the future value of the property
- These mortgages run for your lifetime & only require repayment upon death or moving into long term care
- If moving house, interest only lifetime mortgages can be ported across subject to new property criteria
- Flexibility includes the option to switch from interest only to roll-up, thus ceasing any future payments
Disadvantages of Interest Only Lifetime Mortgages
- If any equity release interest only mortgage is paid-off early, substantial penalties could be charged
- Taking equity from your property will reduce the inheritance you pass onto your beneficiaries
- Monthly repayments must be maintained, otherwise the mortgage balance will increase
- Taking too much initial equity can affect means tested benefits, thus advice should always be obtained
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