An interest-only lifetime mortgage scheme is a great option for the homeowner who wants to release equity from their home but is concerned with interest roll-up. This product allows you to make monthly payments to cover either part, or all, of the interest accrued each month.
What is an interest-only lifetime mortgage?
An interest-only lifetime mortgage works exactly how its name suggests. With this equity release scheme, you are allowed to make monthly interest payments against your loan. This means that instead of the interest rolling up and compounding, you are able to pay it off as it accrues.
One of the primary reasons this type of loan is so attractive is because by paying off the interest as it accrues, you are better able to leave behind an inheritance to loved ones since you are keeping as much equity as possible in the home.
This is also a popular option for the homeowner who cannot attain a traditional mortgage during their retirement. The interest-only lifetime mortgage works just as a traditional mortgage would.
How does an interest-only lifetime mortgage work?
You can attain an interest-only lifetime mortgage in the same way you would any equity release scheme. The same factors are considered when you apply, including your age or the age of the youngest homeowner, and the overall value of your home. You need to be minimum of 55 years old and your home must have a minimum valuation of at least £70,000.
As with other lifetime mortgages, the provider will use loan-to-values to determine the amount of equity for which you qualify. So, the older you are, or the older the youngest homeowner is, the more money you are likely to receive.
How much interest do I have to pay?
The primary difference between this product and a traditional lump sum lifetime mortgage is that you pay down the interest, essentially lowering the overall amount you’ll owe when the home is sold. That said, you’ll need to know how much interest you have to repay.
With an interest-only lifetime mortgage, you are able to determine the level of interest you want to pay back, so long as you are meeting the requirements of your plan. You are also able to determine the level of contribution. You want to take this consideration seriously since it has direct ramifications for the amount of inheritance you can leave behind.
Your contribution will depend on a couple of different factors. They include how much inheritance you want to leave behind, as well as the size of the loan you took out and your monthly income. You make your monthly contribution via direct debit.
If the payment you choose to make is less than the actual interest charged, the remaining interest balance will roll-up, or compound. That said, the amount that rolls-up will obviously be much lower than if you were not making any payments at all.
If you want to keep your balance as low as possible, and only owe the actual amount you originally borrowed, you would need to pay the full interest that accrues each month.
There are many benefits to this particular lifetime mortgage scheme:
– Interest Impact: There are multiple benefits related to interest. First, you have the option to maintain a level mortgage balance by paying off the full interest balance each month. Secondly, Interest rates are often fixed for life. And you do not have to be subjected to an income of affordability check.
– Maintain Ownership: You retain full ownership of your home while still living there.
– Repayment: You only repay the loan when your home is sold, either upon death or movement into a long-term care facility.
– Flexibility: You are able to transfer your interest-only lifetime mortgage to a new property, if needed. In addition, some plans have the flexibility to switch to a traditional roll-up mortgage if you so choose.
While an interest-only lifetime mortgage provides several advantages, there are some potential drawbacks as well:
– Penalties: If you pay your interest-only lifetime mortgage off early, you will likely incur penalties which can be quite substantial.
– Reduced Inheritance: As with any equity release product, you are lessening the inheritance you can leave behind to loved ones.
– Monthly Payments: With this product, you do have to maintain monthly payments which means having to remember that payments are due each month. It also means that if you don’t maintain your payments on time, the balance of your mortgage will increase.
Finally, if you take too much equity, you can affect your means-tested benefits. Because of this, we always advise that you reach out to a qualified equity release provider to go over the benefits and risks of an interest-only lifetime mortgage in more detail.