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Interest only lifetime mortgage

Find out if an interest only lifetime mortgage is the right choice for you

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By Pete Mugleston   Mortgage Advisor

Last updated: 8th February 2019 *

Is an Interest-Only Lifetime Mortgage for You?

An interest only lifetime mortgage is a form of equity release, and is essentially a long-term loan secured on a property that either fully or partially owned by the borrower.

For some, it is the most cost-effective form of equity release because it allows you to manage the associated interest charges through monthly repayments.

While these schemes are popular, there are associated risks and they’re not suitable for everyone. What’s more, all lenders have certain eligibility criteria you have to meet.

This article covers this scheme in more detail and discusses the pros, cons and associated risks of using equity release to pay interest only lifetime mortgages. You’ll find the following topics below…

  • How do lifetime mortgage interest only work?
  • What criteria do I have to meet for an interest only lifetime mortgage
  • Am I able to repay an interest only lifetime mortgage early?
  • What are the pros of an interest only lifetime mortgage?
  • What Are the cons of an interest only lifetime mortgage?
  • Other individual circumstances

How do interest-only lifetime mortgages work?

Lifetime mortgage schemes allow you to release equity (borrow money) secured against your own home, while retaining full ownership of the property. Interest is charged on what you’ve borrowed, which can be paid off, or more commonly, added onto the total loan amount.

When you die or move into long-term care the home is sold, and the cash generated from the sale will be used to pay off the outstanding mortgage and any interest. Any additional profit will go to your beneficiaries.

What happens if the property’s sale doesn’t settle the loan?

If there is not enough money left from the sale, your beneficiaries are responsible for repaying the remaining sum owed using other assets from your estate.

However, many lifetime mortgage lenders have no-negative-equity guarantees in place to prevent this from happening. This is where the lender promises that you or your beneficiaries will never have to pay back more than the value of your home, regardless of whether the debt ends up exceeding the property value.

How interest is calculated on an interest only lifetime mortgage

With interest only lifetime mortgage schemes, you will receive your lump sum of cash and pay a monthly interest fee on the loan, which can either be fixed or variable, so as to prevent the interest rolling up.

As long as you keep up with the interest payments the amount you owe never increases. What is unique about interest only lifetime mortgages is that the level of interest repaid to the lender can be determined by the homeowner.

For example, if for whatever reason you can’t or don’t want to make the full repayments you can opt to make partial payments. The most common option for those going down this path is to repay the interest each month in full, so as to maintain consistent mortgage balance.

Am I Eligible for an Interest-Only Lifetime Mortgage?

First off, you and your partner must be a minimum of 55 years old to qualify for a lifetime mortgage scheme. Other factors affecting eligibility and how much you are able to borrow will be based on the market value of the property and the amount of equity available.

In addition, you must of course meet the lender’s affordability criteria, which will be determined by factors such as pension income, inheritance retained as well as the size of the loan you take out.

Most interest only lifetime mortgage providers will require you to take out a minimum loan amount (this will vary from lender to lender), and the maximum you can borrow is calculated using the loan to value (LTV) ratio.

This takes into account the amount of equity available, the market value of the property alongside the age of the youngest applicant. The amount of equity you can release typically increases the older the homeowners are, due to the reduced life expectancy period.

What Are the Pros of an Interest-Only Lifetime Mortgage?

In the UK, there are no restrictions with regards to how you use your lump some of cash. Many people are tempted by the prospect as it allows them to live a better quality of life in their retirement years, make home improvements or provide financial assistance to family members. Other advantages include:

  • These types of mortgage run for your lifetime and only require repayment upon death or moving into long term care.
  • Interest only lifetime mortgages allow you to retain full ownership of your property and do not require you to sell any portion of your home.
  • The cash can be used as a way of increasing pension funds so as to secure a better quality of life after retirement.
  • This can be a good alternative to downsizing, allowing homeowners to continue the lifestyle they’re used to with without having to relocate.
  • You can opt for a fixed interest lifetime mortgage rate for life, so future affordability is secured well in advance.
  • They can be repaid at any time, and depending on your circumstances you may be able to do so without incurring an early repayment charge.
  • These types of mortgages are transferable, meaning it can be moved to another property (provided you meet your lender’s criteria).

Unlike regular residential mortgages, age, property value and the amount of equity you have are the main factors determining eligibility, rather than income or credit history.

What Are the Cons of an Interest-Only Lifetime Mortgage?

While there are many reasons people opt for an interest only lifetime mortgage and there are plenty of pros to the scheme, it’s important to consider the potential risks you may encounter:

  • Releasing equity from your property will reduce the inheritance you pass onto your beneficiaries later down the line.
  • Releasing equity has an impact on your income or savings, which could affect any means tested benefits you’re currently receiving.
  • Your monthly repayments must be maintained, otherwise the mortgage balance will increase. Missed payments may also result in the mortgage being switched to a roll up mortgage, which means you have less control over the loan balance.
  • Monthly payments could become unaffordable if your income reduces for any reason -  for instance, if your partner passes away and a single income isn’t enough to pay the fees.
  • With some forms of this type of mortgage, missing payments could potentially put you at risk of repossession.
  • There may be hefty early repayment charges (ERCs) if you wish to pay off the home equity loan earlier (see below for more information).

Give that interest only lifetime mortgages come with drawbacks for some borrowers, it’s important to seek expert advice to find out what other alternatives are available. There may be better options for somebody in your circumstances - get in touch and the whole-of-market advisors we work with will discuss them with you.

Can I Repay an Interest-Only Lifetime Mortgage Early?

As the name suggests, lifetime mortgages are intended to last a lifetime and are typically only repaid when you (and your partner, if applicable) die or enter long term care. If you want to repay early, you may be required to pay a hefty early repayment charge (ERC). This charge is based on the costs that providers incur when setting up a lifetime mortgage.

However, lenders can be flexible and, depending on the circumstances, you may be exempt from this charge. For example, ERCs only apply until the youngest borrower reaches the age of 88. You may also be exempt from paying this charge if any of the following apply:

  • As outlined above, you will not incur a charge if you (or if you’re joint borrowers, the last surviving of you) dies or goes into long term care.
  • If you’re joint borrowers and the last surviving of you repays in the first three years after the first of you dies or moves into long term care.
  • If you repay after you (or if joint borrowers, the youngest of you) reach a specific age as outlined in your Offer of Loan.

There are also other exemptions which are lender specific. Some, for example, might charge a fixed penalty of 5% percent of the total capital borrowed in the first five years, 3% during the next five years, and the nothing thereafter. Other lenders use a combination of a fixed rate penalty over five years and then swap rates relating to the long term impact of interest rates.

How Do Individual Circumstances Affect Getting an Interest-Only Lifetime Mortgage?

As always, there are certain other factors which will affect your eligibility to take out a mortgage of any sort. Unlike with residential mortgage applications however, an interest only lifetime mortgage does not rely so heavily on income or having perfect credit history.

Your age, the value of the property and how much equity you own are the three key factors determining eligibility for a lifetime mortgage. Requirements vary by lender, but most require the property to be over a certain value, and you will need to have paid off a certain amount of your mortgage.

The chances are that instances of poor credit in the past should not affect your ability to release equity in your own property for such schemes. There are also some lenders who will allow you to do so if you’ve had county court judgements (CCJs) or bankruptcies in the past - although you are required to declare any incidents on your application, and this will be determined on a case by case basis.

Speak to an interest only lifetime mortgage expert

If you’d like further advice on interest only lifetime mortgages, call Online Mortgage Advisor on 0800 304 7880 or make an enquiry here. Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances. We don’t charge a fee, and there’s no obligation or marks on your credit rating.

Updated: 8th February 2019
OnlineMortgageAdvisor 2019 ©

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The info on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.