Interest-only lifetime mortgages are a great option if you want to release equity from your home but don’t like the idea of having the interest compound over time.
With an interest-only plan you can enjoy your cash while making monthly interest payments to help keep your balance down. If you make the monthly payments consistently every month and you cover the full balance of the interest accruing, your loan will only ever be the same amount of your original loan.
Interest-only Lifetime Mortgage: How it Works
Interest-only lifetime mortgages function in just about the same way as a traditional lifetime mortgage scheme. The criteria are virtually the same as well. You need to be at least 55 years old, or if borrowing jointly, the youngest borrower needs to be at least 55. In addition, the property you own must be worth a minimum of £70,000.
The older you are, the bigger the release that will be available to you. This is because providers use loan-to-value percentages to determine your equity release. The value of your home will also be a factor in determining the size of your loan.
How much will my payments be?
There have been recent changes to how interest-only lifetime mortgages are administered. It was once true that you had to prove you could afford the payments you would be making. That is no longer the case. You no longer have to prove your income or your ability to make the repayments.
This means, in large part, that you get to control the frequency and amount of the payments you make. The only caveat is that you must meet the terms of the loan you have created with your equity release provider.
The amount you pay toward the loan is a big decision, however, which is why we advise all retirees to attain reliable advice in determining how much to pay. You can use one of our advisers to discuss what considerations you should make when deciding how much to pay. Things you’ll want to think about are how much inheritance, if any, you want to leave behind to loved ones as well as the overall size of your loan and your income.
Bear in mind that if you do not pay the full interest that accrues each month, your loan will still increase because the interest not repaid will roll-up, or compound. If you do pay all of the interest every month, which is the most popular use of this type of lifetime mortgage, your balance will only ever be the actual loan you took out.
Whatever payment you decide to make will be paid through direct debit to your provider.
Can I get a mortgage even though I’m already retired?
Yes! While it can be challenging to secure a traditional mortgage product if you are already in retirement, that is not the case with lifetime mortgages, where borrowing is allowed from ages 55 all the way up to 90 and sometimes older.
Lifetime mortgages have grown substantially in popularity. They allow retirees to tap into the equity built into their homes and receive cash they can spend however they want. This means you can use the money from your lifetime mortgage to take a holiday, spend down debt, or make large purchases that you have been putting off.
How much can I release with an Interest Only Mortgage?
Benefits
There are many benefits to an interest-only lifetime mortgage including:
• Possibility of maintaining a level mortgage balance
• Fixed interest rates and monthly payments
• Retain 100% ownership of your home and continue to live there
• Transferrable to another property under the right circumstances
• Flexibility to switch to other plans with some providers
Drawbacks
• Early repayment penalties if you pay off the principle too early
• Reduced inheritance for loved ones
• Impact on means-tested benefits if you withdraw too much
• Mortgage balance will increase if you don’t maintain payments that cover the full interest accrued
Given that means-tested benefits can be impacted by this type of lifetime mortgage product, we always advise retirees to reach out to one of our trusted advisers to determine how best to approach an interest-only scheme. We can also review all benefits and potential drawbacks so that you make the most educated decision for your individual situation. You can contact us by phone, email, or live chat below.