An interest-only lifetime mortgage is a type of loan 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, to ensure that the balance of the loan remains level.
The remaining balance is usually paid back when you die or move into long-term care following the sale of your property. If there's any money left over after paying off your loan, the excess balance goes to your beneficiaries.
Eligibility for interest-only lifetime mortgage schemes
To ensure you're 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 - your home must be worth £70,000 or more.
The type of property you live in - lenders prefer bricks and mortar buildings over non-standard construction properties, like thatched cottages or prefabricated houses.
Where your property is - it must be in the UK.
Credit history - if you have a poor 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 and find lenders with the best interest rates so you don't pay any more than you need to.
Interest rates for interest-only lifetime mortgages
The interest rates on an interest-only lifetime mortgage are fixed and 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, or all, of your loan, some lenders might apply 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 when you die.
Interest-only lifetime tracker mortgages
You may have heard of an interest-only lifetime tracker mortgage. This type of mortgage is similar to an interest-only retirement mortgage but, 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 the 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 to 50%, although some can consider up to 55 or even 60% in certain circumstances.
Every lender is different when it comes to how much they'll 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. Usually, the older you are the higher LTV you might expect.
Lenders will also consider your health when assessing your application. Where health issues are a factor, a doctor’s report will be requested to provide evidence of your illness or condition. 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 for 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.
Most lenders will use 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 mortgage 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 one of the specialist advisors we work with.
Call 0808 189 2301 or make a quick online enquiry.
Interest-only retirement mortgage calculator
It's common to make use of online mortgage calculators to get a better understanding of how much you can borrow when taking out an interest-only retirement mortgage in the UK.
Online calculators like these can provide a rough estimation of the kind of deal you might be able to get but, because they work on very rough calculations, they won’t be able to give you an exact figure.
Every lender uses different criteria to calculate how much they're willing to lend 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, talk to one of the advisors we work with. We'll match you with 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. This charge is based on the costs incurred when your lender set up your lifetime mortgage.
However, lenders can be flexible and, depending on the circumstances, you may be exempt from this charge. For example, early repayment charges only apply up until the youngest borrower reaches the age of 88.
You may also be exempt from paying this charge if any of the following apply:
If you (or if you’re joint homeowners, the last surviving of you) dies or goes into long term care.
If you’re joint homeowners 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 homeowners, the youngest of you) reach a specific age as outlined in your Offer of Loan terms.
There are also other exemptions which are lender specific. For example, some lenders 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 might use a combination of a fixed rate penalty over five years and then swap rates according 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 sum of cash.
Many people are tempted by the prospect of a lump sum since it affords them better quality of life in their retirement years, allows them to make home improvements or helps them to provide financial assistance to family members.
Other advantages include:
The mortgage runs for your lifetime and only requires 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.
Lifetime mortgages can be a good alternative to downsizing, allowing you to continue the lifestyle they’re used to 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.
Things such as:
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 will leave you with 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 your home equity loan earlier (see below for more information).
Given that interest-only lifetime mortgages come with drawbacks for some homeowners, it’s important to seek expert advice to find out what other alternatives are available.
There may be alternative arrangements which might be better suited to your circumstances - get in touch and the whole-of-market advisors we work with will discuss your situation and outline all your possible options to help you reach a decision you're happy with.
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. Some of these may work out to be more flexible and cost efficient for you.
Possible alternative options include:
Home reversion plans
Raise money by selling a share or, in some cases, all of your home. You can live in your property until you die or move into residential care. The experts we work with would be happy to discuss home reversion plans with you and help you understand if they would be suitable for you. Call 0808 189 2301 or make a quick online 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 also allows you the freedom to stop paying whenever you like and simply add the interest onto your loan.
Similar to standard equity release and interest-only retirement mortgages, the remaining balance of the loan is paid off in the event of your death or when you move into residential care, following the sale of your home.
Why you should speak to an expert interest-only lifetime mortgage broker
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If you have questions and want to speak to an expert for the right advice, call 0808 189 2301 or make a quick online enquiry.
We'll match you with a broker with the right knowledge and expertise for your circumstances. The service we offer is free 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!
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