Voluntary repayment mortgages offer some unique benefits to those homeowners who want the advantages offered by an equity release scheme but who also want to protect the inheritance they can leave behind to loved ones.
A voluntary repayment mortgage provides a great deal of flexibility and even allows you to control the overall balance of your loan.
How does a voluntary repayment plan work?
With this type of equity release, you can make individual repayments against the balance of your loan. Those payments can be of just interest or can include capital. Either way, you are essentially controlling the overall balance of the loan that will need to be repaid when the home is finally sold.
Instead of the interest rolling up, or compounding, on the loan, you can repay up to 15% of the original amount borrowed every year without receiving any penalties. This amount is an average, but differs by provider.
To qualify for a voluntary repayment plan, you must be at least 55 years old and your property must have a minimum valuation of £70,000. Once qualified, you can choose if you want to take out a lump sum plan or a drawdown one. With both, you receive a cash lump sum payment from the equity in your home and you can use that money however you want. You’ll incur interest charges based on the individual plan selected. However, with a voluntary repayment structure, you will be able to control some of the impact of interest by making payments to the lender.
If you are able, you may even be able to pay more than the interest accruing on your loan. If you do so, you could reduce the actual mortgage balance.
Benefits of a voluntary repayment plan
The application process is not very invasive with a voluntary repayment plan. Because the payments are voluntary, there is no income verification required. If you’ve had a negative experience applying for a traditional mortgage because it seemed you wouldn’t be able to afford it, a voluntary repayment might be a good option for you.
Secondly, you can make your repayments voluntarily, so it is essentially up to you provided you don’t exceed the maximum limit. You won’t incur any administrative penalties or fees when you make payments.
It is convenient to make payments as they are typically done through debit card, online bank transfer, or via cheque. Some lenders will even allow you to make a standing order so that they are automatically deducted from your payment choice.
With these plans, you are not mandated to make specific payments. Instead, you can choose if you are going to make payments or not. You can enjoy the flexibility of making payments if you want to do so while also benefiting from a fixed interest rate for the lifetime of the loan.
Repayment Options
There are a number of repayment options available depending upon your chosen lender. A few of those options are described in more detail below.
Interest-only repayments
If you choose to make repayments of just interest, you will essentially keep your loan balance the same. In the end, if you keep up with interest payments as your interest accrues, the total balance of your loan will be the initial loan you took out. This option can allow you to still leave behind some inheritance to your loved ones.
Maximum repayments
With this option, you repay the interest on the loan but also include a payment toward the capital as well. If your lender allows, it is possible to repay the full balance over the course of 8 or 9 years. This would typically occur if you were using the 15% voluntary repayment option, if allowed by your lender.
Random repayments
If you just want to occasionally make payments toward your loan, you can do so. That said, it won’t have quite as big an impact as the other two options reviewed. However, it will slow down the impact of the roll-up of interest.
If you’d like to review how you could take advantage of a voluntary repayment plan, reach out to us today to discuss what options might be best for your individual situation. Our trusted advisers can review all of the options available to you.