- February 22, 2018
Voluntary repayment plans are one of the most flexible equity release schemes you can secure and they give you a level of control you won’t find with many other lifetime mortgage products. This scheme allows you to protect an inheritance for you loved ones given that you are afforded some control over the outstanding balance of your loan.
If you want to leave behind an inheritance and aren’t keen on just watching your interest compound, a voluntary repayment mortgage might be the right option for you.
What is a voluntary repayment mortgage?
This lifetime mortgage scheme allows you to make ad-hoc repayments against your loan. Those repayments can go toward interest and/or capital. Depending on what you pay, you can eliminate the roll-up of any interest and in some cases, if you pay toward the capital, you can even decrease your overall loan balance. There are several strategies you can employ with this plan, depending on what impact you want to have on your loan balance.
Most lenders allow you to repay up to 15% of the original amount borrowed every year, without incurring any penalties. This percentage is the most common, but each provider will have their own regulations that govern the terms of your repayment.
How does a voluntary repayment plan work?
In order to qualify, you must be at least be 55 years old and your property must have a minimum valuation of £70,000.
You can decide if you want a lump sum plan or a drawdown lifetime mortgage. You receive your cash payment, tax-free, and you can spend it however you want. Interest is charged on the loan, in accordance with the terms of your particular plan. However, instead of that interest compounding, you make payments back to the provider so that you are repaying at least part of the interest as it accrues, if not all of it. Whatever you pay toward your loan will help to offset the impact of the interest rolling up.
If you pay more than the interest that is being charged, you are actually able to decrease your overall loan balance.
There are many benefits to using a voluntary repayment plan as your equity release scheme. Some of them include the following:
• No income check required
• Voluntary repayments can be made without penalties or administrative fees
• Transfer your payments via online bank transfer, standing order, cheque, or debit card
The biggest benefit with these plans is that you can control the balance of your loan. You can choose to pay just the interest, which essentially leaves your loan balance maintained, or you can pay even more and make a dent in your overall balance. Both of these have direct impact on your ability to leave behind an inheritance to loved ones. It also directly influences how much money you can leave to loved ones.
There are different repayment strategies you can use when deciding how much to pay against your loan. You can make interest-only payments, pay the maximum repayments allowed, or make completely random repayments.
If you choose this strategy, you will be able to keep your loan balance level. With this approach, you can leave behind an inheritance to your loved ones.
With this strategy, you don’t just pay the interest accruing on your loan but you also pay something toward the capital. If you are allowed under your plan and you pay the full 15% that is typically allowed, you could end up paying off your full loan balance in just 8 or 9 years.
You can also choose to just make payments randomly. You could just make payments when you have extra cash. Even though your balance won’t decrease using this strategy, anything you pay will directly combat the impact of accruing interest. That said, your balance will still increase over time, as you won’t be paying the interest as it accrues.
If you want to learn more about the benefits of a voluntary repayment plan, or how it might work for you, please reach out to use for a free consultation. One of our experienced advisers can review your particular situation and help you identify the best plan for you.