Pete Mugleston | Mortgage AdvisorPete has been a mortgage advisor for over 10 years, and is regularly cited in both trade and national press.
Updated: 3rd July 2019* | Published: 12th April 2019
We get lots of enquiries from people who want to know more about interest only lifetime mortgages and how much they can borrow against their home.
There are a range of lenders who offer lifetime interest only mortgages and each one has varying criteria which they’ll use to assess your application. Luckily, we work with expert advisors who are trained to find lenders who are more likely to approve you, as well as find you the best possible interest only lifetime mortgage rates.
We have gathered all the key information you’ll need to know about interest only lifetime mortgages and you’ll find the following topics covered below...
An interest only lifetime mortgage is a type of loan that is secured against your home that allows you to release equity from your property. Like a standard interest only mortgage, the borrower will be expected to pay the interest of the loan on a monthly basis, which ensures that the balance of the loan remains level.
The remaining balance is usually paid back when you die or move into long-term care from the sale of your property. If there is any money left over after paying your loan, this is inherited by your beneficiaries.
Eligibility for interest only lifetime mortgage schemes
To ensure you are eligible and can afford to take out an interest only lifetime mortgage, lenders will carry out checks which may involve looking at:
Your health - this can affect the amount you can borrow
Your age - you must be aged 55 and over
Your income - this could be from a job, pensions or savings
The property value - it should be worth a minimum of £70,000
The type of property you live in - lenders prefer standard construction
Where your property is - it must be in the UK
Credit history - this may affect how lenders judge your ability to pay the interest
Before making an application for an interest only lifetime mortgage, you should talk to an expert who can look at your circumstances and compare the best interest only lifetime mortgages for you.
Interest only lifetime mortgage interest rates
The interest rates on an interest only lifetime mortgage are fixed and are charged based on the full loan amount.
This type of loan allows you to pay off the interest of your loan monthly without paying back the loan itself until the end of the term.
If you do wish to pay back some of your loan, there may be penalty fees so always check the terms and conditions of your loan agreement before proceeding.
Furthermore, if you are considering leaving inheritance to your beneficiaries, be mindful that your interest payments as well as the cost of the loan itself will reduce the overall amount that you can leave to them.
Interest only lifetime tracker mortgages
You may have also heard of an interest only lifetime tracker mortgage. This type of mortgage is similar to an interest only retirement mortgage but the big difference is that rather than paying a fixed amount of interest, the amount of interest you pay can fluctuate (usually based on the Bank of England’s base rate.)
This means that if their base rate goes up, so will the amount of interest you pay on your tracker mortgage deal.
How much could you borrow with an interest only lifetime mortgage
Most lenders will consider a maximum loan to value (LTV) ratio of 40-50%, although some can consider up to 55-60% in certain circumstances. Every lender is different when it comes to how much they will lend but the amount of equity you can release is usually based on your age, health, income and the market value of your property.
Lenders will look at your age to calculate the amount of equity you can release and would usually offer a higher LTV if you are older.
Lenders will also consider your health when assessing your application, and for any cases where health issues are a factor, a doctor’s report will be requested to provide evidence of the illness or condition. This is because most lenders are willing to increase the LTV for homeowners with serious health issues as they are perceived to have a shorter life expectancy.
A lender will want to be confident that the loan is affordable to you based on your income during retirement. Loans are generally capped at 4.5x income, although some lenders may consider loaning 5x your income (or more) in the right circumstances.
Your lender may take your pension, benefits and any savings you have to determine what your income is and how much interest you can afford to pay each month.
When you apply for a lifetime mortgages interest only scheme, the lender will arrange for your house to be valued and will also want to know how much equity you currently hold in the property.
Usually the more equity, the more favourable the LTV.
If you’d like a quote for an interest only lifetime mortgage or want to know more about how lenders will assess your affordability, contact a specialist here.
Interest only retirement mortgage calculator
Many homeowners use online mortgage calculators to get a better understanding of how much they can borrow when taking out an interest only retirement mortgage in the UK. These can provide a brief estimation, however, they won’t be able to give you an exact figure.
This is because every lender uses different criteria when they calculate how much they are willing to lend to you and some lenders are more lenient when considering applications from homeowners with more exceptional circumstances i.e. bad credit or a non-standard property.
For a more accurate figure, it’s best to talk to an advisor who has specific experience and knowledge about interest only retirement mortgage lenders.
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.
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.
Are there any other alternatives to an interest only lifetime mortgage?
There are alternative options that may be available to you depending on your circumstances and these and may also work out more cost efficient or provide more flexibility.
These can include:
Home reversion plans
You raise money by selling a share or in some cases, all of your home. You are still able to live in the property until you die or move into residential care. The experts we work with would be happy to discuss these with you if you make an enquiry.
Hybrid Equity Release
There are lenders who now offer a hybrid of equity release and an interest only retirement mortgage (RIO). This option would allow you to pay some or all of the interest monthly, but it would also give you the freedom to stop paying whenever you like and just add the interest onto your loan.
Similarly to standard equity release and an interest only retirement mortgage, the remaining balance of the loan is paid off in the event of your death or your move into residential care, from the sale of your home.
Why you should speak to an expert interest only lifetime mortgage broker
Here at OMA, we take pride in providing a 5-star service with access to expert advisors who are...
Whole of market brokers
LIBF Training course qualified
Experts on interest only lifetime mortgages and able to offer bespoke advice on them
Known to have working relationships with specialist interest only lifetime mortgage lenders and know which ones to approach for the best rates
Speak to an expert about interest only lifetime mortgages
If you have questions and want to speak to an expert for the right advice, call Online Mortgage Advisor today 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 absolutely no obligation or marks on your credit rating.
*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.
Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes.
The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.
Pete's presence in the industry as the 'go-to' for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!
Read more about Pete here...
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