Equity Release has become a popular way for UK homeowners to boost their income in later life. There are lots of options, with the most popular being lifetime mortgages, but did you know there are also various types of lifetime mortgage plans?
Read on to learn all about interest-only lifetime mortgages, and please don’t hesitate to contact Think Plutus if you have any further questions.
What is an interest-only lifetime mortgage?
Interest-only lifetime mortgages are a fairly new way to release equity whereby you pay the interest accrued each month. This means the overall size of your loan repayment never goes up. This option is growing in popularity among people over 55, but could it be the right solution for you?
How do interest-only lifetime mortgages work?
Like with other types of lifetime mortgage, an interest-only lifetime mortgage enables you to release equity – the money that is tied up in the value of your home. You can spend this money as you wish, but you must meet certain eligibility criteria, such as being aged 55+.
Interest-only lifetime mortgages differentiate themselves from other equity release schemes in that you pay off the interest that accumulates on your loan amount each month. This is as opposed to paying it off in one go, along with the total loan amount, when your property is sold after you pass away or move into permanent residential care.
As you’re paying off the interest alone, the balance owed on the loan itself remains the same.
What are the key differences with interest-only lifetime mortgages?
There are five fundamental ways an interest-only lifetime mortgage stands out among other mortgage plan types:
- You only repay the interest in regular payments – the balance owed never increases or decreases
- There isn’t an upper age limit – as long as you are aged 55+, you qualify
- Interest rates can be fixed for life – this helps you plan for your finances in retirement
- There isn’t a specified end date – the loan is repaid once you move into permanent care or die
- You can stop making the interest payments any time – you’ll remain in your home, but the interest will be added to your debt from the point you stop payments
Interest-only lifetime mortgages are becoming increasingly popular among over-55s because they are seen as a good way to protect the inheritance you leave behind. You retain full ownership of your home and any increase in the value of your property will be reflected in the value of your estate when it is sold.
The fact that interest-only lifetime mortgages don’t penalise older borrowers is another important benefit. In fact, the older you are, the more equity you can release, so it can be a fantastic option for more senior borrowers. The calculations of interest-only lifetime mortgage lenders are based on the age of the youngest applicant and the property’s current market value.
It’s important to note that, though the monthly payments will usually be significantly lower than with a standard residential repayment mortgage, the interest rates of interest-only lifetime mortgages are higher. This means that the amount of interest you pay over time will be greater without increasing your share in the ownership of the property.
Let’s break that down in an example:
You borrow £200,000 with an interest-only lifetime mortgage.
- The value of your home increases over time, but you must make the monthly interest payments, and the £200,000 must be repaid by selling your home when you die or move into permanent care.
- Your family will benefit from the price increase, but the inheritance is reduced because the £200,000 debt must be repaid.
- Without the interest-only lifetime mortgage, your family would benefit from the full sale of your home.
Is an interest-only lifetime mortgage right for me?
The past has shown that, for retired people, age is a barrier to borrowing, but this is changing. When it comes to interest-only lifetime mortgages there is no age barrier – you can borrow whether you are 55 or over 90 years old. Interest-only lifetime mortgage lenders take a practical approach that is becoming increasingly attractive to people seeking to release tax-free funds locked up in their homes in later life.
You could be a good candidate for an interest-only lifetime mortgage if:
- You’ve been comfortable with an existing residential interest-only mortgage but your lender needs repaying
- You’d like to provide financial support for a family member without jeopardising the inheritance you leave for the rest of your loved ones
Let’s take a look at the advantages and disadvantages of interest-only lifetime mortgages. You need to assess whether they are a viable option for you, and many of these pros and cons will apply to other lifetime mortgage types. Think Plutus can help crunch the numbers and point you in the direction of the best options available.
Advantages
- You retain homeownership – any future increase in value will still benefit you and your family
- Interest rates are fixed – monthly repayments never change and your debt never increases
- The cash released is tax-free – moreover, you can spend it however you like
- You can cease making payments anytime – this will switch your plan to a ‘roll-up’ mortgage
- You don’t have to repay the loan amount in your lifetime – the loan is repaid by selling your home when you go into permanent care or die
- It’s aimed at over-55s – if your home also fits the bill, you qualify
- You can still move house – if the new property meets the criteria, you can take your mortgage with you
- It’s not income-based – the only factors are your age and property value
Disadvantages
- Inheritance will be affected – releasing equity will reduce what you can leave in your estate
- Means-tested benefits may be affected – seek reliable financial advice before proceeding
- Early repayment charges – paying off the loan early will incur a charge
- Interest payments increase your monthly outgoings – most other equity release plans don’t incur monthly payments
- Higher interest rates – they’re fixed for life, so interest-only lifetime mortgage interest rates are usually higher
- There is a maximum amount of cash you can release – this will be a percentage of your home’s value based on your age. There are alternative options if you need to release more equity
- Your home must be mortgage-free – unless you can borrow enough to clear your existing mortgage
What are the alternatives to an interest-only lifetime mortgage?
While interest-only lifetime mortgages are useful for some, they aren’t the only way to release equity from your home. You can unlock tax-free money from your home by taking out other lifetime mortgage types or opting for a home reversion scheme:
- Drawdown lifetime mortgage – this is where you take out your loan in instalments, which you withdraw from an interest-free reserve account as and when you need it.
- Roll-up lifetime mortgage – take out a tax-free lump sum with no monthly payments, and pay off the loan plus interest when you move into permanent residential care or die.
- Enhanced lifetime mortgage – reserved for people with medical conditions, these allow you to unlock extra cash at better rates.
- Flexible lifetime mortgage – a plan where you can make voluntary payments at will to reduce your total loan amount.
- Home reversion – this is a plan where you unlock tax-free cash from your home by selling a portion (or all) of it to the equity release lender.
Get quality lifetime mortgage advice from a trusted source
Think Plutus is an FCA-regulated mortgage advice service with experienced, accredited advisers who can offer expert insight into the equity release market. We go the extra mile to understand the circumstances of our clients so that we can assess the criteria and perform a whole-of-market search to find the best possible deal for you. We are always honest and impartial and will answer your questions and give quality advice regarding whether or not equity release is a good option for you.
Our advisers are friendly and approachable and you can easily get in touch today to get the ball rolling. We urge you to involve your family in the decision-making process and will always have your best interest in mind when we present our findings and opinions to you. For quality equity release advice you can depend on, Think Plutus.
