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Interest Only Lifetime Mortgage

If you’re a homeowner looking to raise funds from your home, equity release could be for you. If you have children or beneficiaries in your will and you’re wondering how equity release could affect their inheritance, perhaps you should consider an Interest Only Lifetime Mortgage?  

Read on to find out more about how these schemes work.

What is an Interest Only Lifetime Mortgage?

Like with a Lifetime mortgage, the interest only portion relates to how the interest of the loan is repaid. With many lifetime mortgages, the interest is paid when the property is sold. However, by taking an interest only option, you can pay back the interest on the loan amount, every month.

Interest Only Lifetime Mortgages end when the last partner in homeownership dies or goes into permeant care. These are also sometimes known as ‘Equity Release Mortgages’, ‘Pensioner Mortgages’ or ‘Retirement Mortgages’.

Interest Only Lifetime mortgages are designed specifically with beneficiaries of your will in mind. When you pay back the interest on the loan, you are essentially protecting the funds left in your estate. This allows the maximum amount of money to be passed on to your loved ones.

To find out more about Equity Release, take a look at our guide.

Am I Eligible for an Interest Only Lifetime Mortgage?

• The amount you can borrow in this type of mortgage is dependent on your age, home value and health status. You must be over 55 to apply and own your own home, in most cases.
• Typically, the older you are, the more money you can release from your property with a mortgage of this type.
• To be approved for an interest only lifetime mortgage, in many instances, your property must be worth more than £70,000.

How is an Interest Only Lifetime Mortgage Repaid?

By paying back the interest owed, in small monthly instalments. These mortgages stop the cost of the loan from compounding rapidly, like with a conventional lifetime mortgage, where the interest is rolled up. It is also worth noting that you can also find repayment lifetime mortgages, where you can pay back the capital, as well as the interest of the loan, in instalments.

Another feature of interest only lifetime mortgage is that the interest rate remains fixed for the entirety of the mortgage term, so you can plan your monthly budget accordingly. Some plans will also allow you to pay back the interest on a more ad hoc basis, and you may be able to pay back up to 10% of the mortgage capital, as a yearly allowance. This makes it possible for a borrower to pay back the full lifetime mortgage loan before they die.

If you wish to move after taking out a lifetime mortgage, under many agreements, you can get permission to ‘port’ your mortgage. However, if you move to a lower value property, you may have to repay part of your lifetime mortgage.

If you are thinking about taking out an interest only lifetime mortgage, it is highly advisable to speak to an independent mortgage broker beforehand. They can help you find the most affordable deal for your financial circumstances.

Let’s Look at an Interest Only Lifetime Mortgage Example:

Charles and Lorraine own their £200,000 home and chose to borrow £60,000 through an interest only lifetime mortgage charged at 5.90% APR. By choosing to make monthly repayments of £663.11, the total cost of the loan, at the end of the term, was £79,573.67.

What are the Benefits of an Interest Only Lifetime Mortgage?

• Most Cost-Effective Equity Release Deal – As you are continually serving the interest of this loan, this may be the most cost-effective method for releasing equity.
• Flexibility of Payment – You can choose to pay off the interest monthly, or as ad hoc, small, regular payments. You are also permitted to repay 10% of the mortgage capital as a yearly allowance. Further, if you cannot make your interest payment, from one month to the next, the interest owed can be rolled up and repaid later. However, doing this will increase the total amount of interest owed at the end of the mortgage term.
• Protected Equity – With many lenders, you can choose to add a ‘Protected Equity’ policy to your loan. This ensures that there is an agreed amount of funds leftover, which will be protected and passed down to the beneficiaries of your will.
• Portability – You can move your interest only mortgage, if you choose to move house. This is subject to lender approval, following a valuation.
• No Negative Equity Guarantee – As reputable lifetime mortgages are monitored by the Equity Release Council (ERC) and follow Safe Home Income Plan (SHIP) criteria, these mortgages carry a ‘No Negative Equity Guarantee’. This means that the amount of money borrowed can never exceed the total value of your home.
• Home Value Increases – If the value of your home increases during the length of the term, the increases are passed onto your family. This is because you are agreeing with the lender to serve the loan interest owed with your regular repayments.

What are the Pitfalls of an Interest Only Lifetime Mortgage?

• Your Benefits May Be Affected – If you are eligible for means-tested benefits, your entitlement to state support may be affected. This will, of course, depend on the amount you wish to borrow through an interest only lifetime mortgage. However, any changes will be clearly explained to you during the application process.
• Inheritance Tax Liability – A mortgage of this type could affect your inheritance liability. This is because the amount you owe will be deducted from the value of your estate before your tax liability is calculated.
• Loan Costs – As with any loan, you will have to pay for the admin fees of the loan set-up. You may also need to hire a home valuator and pay your legal representatives, to process the paperwork.
• Higher Interest – Unlike normal mortgages, lifetime mortgages charge significantly more in interest.

What are the Alternatives to Interest Only Lifetime Mortgages?

• Downsizing – If you would like some extra retirement income, you could also choose to sell off your home, buy a smaller one and live off the extra sale proceeds.
• Home Reversion Plans – This is an agreement where you agree to sell off a portion of your home, in order to release home equity. You also get to live in your home rent-free.
• Lifetime Mortgages – If the interest only option isn’t for you, you can choose to take up a lifetime mortgage where the interest is added to the mortgage capital and repaid at the end. Alternatively, you could look at the Drawdown Lifetime Mortgage option. Or, if you have a health condition, the Enhanced Lifetime Mortgage may suit your needs.

To find out more about equity release, take a look at our frequently asked questions article.

Equity Release schemes incur financial risk, so it is vital that if you are considering a lifetime mortgage, you speak to a qualified financial advisor beforehand. Get in touch with one today for your free, no-obligation quote.