Equity Release Scheme
An interest only lifetime mortgage is just a variation of the standard lifetime mortgage. The biggest difference can be found in the way interest accrues on the loan. With a standard lifetime mortgage, the interest simply rolls up and is added to the outstanding loan balance to be repaid upon the same of the home. However, with an interest only lifetime mortgage, the homeowner is able to make monthly interest only payments against their loan. This feature makes the product particularly attractive to those homeowners who are most concerned with leaving behind an inheritance and the overall impact of interest costs.
Interest only lifetime mortgages follow the same eligibility criteria as standard lifetime mortgage schemes. The youngest homeowner must be at least 55 years old and must own property.
The amount available to each homeowner will vary depending on a number of factors and will be based on a calculation that includes the age of the youngest homeowner and the property valuation. In general, older homeowners are eligible to release more equity as their life expectancy is shorter. The lender will let each homeowner know the exact equity release available to them.
How an Interest Only Lifetime Mortgage Works
This product does require an affordability check as the homeowner is required to make repayments. This means that the homeowner must show their current income. In most cases, the homeowner is able to independently determine how much interest they want to repay to the lender. And the homeowner can make that decision based at least partly in the level and frequency of their income.
How much the homeowner pays to the lender directly relates to the overall loan balance. If the homeowner chooses to pay less interest than what is actually accruing on the loan, the loan balance will continue to increase. If the homeowner chooses to, or can pay all of the interest, the balance remains only the amount originally borrowed. Regardless, as long as the homeowner is making interest payments, the balance owed will be less than it would be with a standard interest roll-up lifetime mortgage. Many homeowners select an interest repaying product specifically because they want to be able to pay off the interest in full as it is accruing, which enables them to not only keep their balance consistent, but it also keeps the balance level with the exact amount that was originally borrowed.
Advantages and Disadvantages
As with every product, there are both advantages and disadvantages to an interest only lifetime mortgage.
Advantages for this product start with the fact that the interest rate is fixed. In addition, the homeowner has control over the outstanding loan balance in terms of making interest repayments. If the full interest accrued is paid, the balance will only ever be the original loan amount. In addition, the homeowner retains full ownership of the property and as such can capitalize on any property value increases that occur over time. An interest only lifetime mortgage can also be ported if needed.
Disadvantages to an interest only lifetime mortgage include the fact that if the homeowner chooses to pay the mortgage off early, a costly early repayment charge is likely to be incurred. Removing any equity from the home, even through the use of this product, ultimately means that less inheritance is available for loved ones when the home is eventually sold. In addition, with this product, if the homeowner does not keep up with interest payments, the loan balance will continue to increase. This means that a larger balance will be due when the home is eventually sold, again impacting inheritance and the estate.