Do you need some extra cash quickly? Equity release is an excellent option for quick cash that’s locked up in your home. Interest-only lifetime mortgages are prevalent in the UK. We’re here to tell you everything you need to know.
What are Lifetime Mortgages Exactly?
This type of equity release lets you take out a mortgage on your home if it’s your primary residence. However, you will remain the owner. You’ll have the option to ringfence part of your property for your family to inherit. You can also make repayments or let the interest increase. Better yet, if there’s any loan amount or any accrued interest, it’ll be paid back when you pass away or need long-term medical care.
When it comes to lifetime mortgage plans, they offer tax-free cash release for you to enjoy while you’re retired. At the same time, lifetime mortgage plans also allow you to live in your property after you’ve taken out the plan – meaning you maintain ownership of your property until the plan ends and your provider sells your property.
Best of all:
You have a choice to release all the cash at once as a lump sum or to release small amounts of the money whenever you need it. The smaller release of funds is known as ‘drawdown’.
How are you affected?
If you already have a mortgage you need to repay on your property, the money you release will pay off that mortgage first before you can access more equity. After that, it’s your choice what you do with the rest of the equity that you’ve released.
You can use that cash for anything you want to: buying your dream car, going on that long-awaited overseas trip, doing home renovations, or helping your kids to pay for investment – you have absolute freedom to do as you wish with your mortgage money.
Let me tell you something:
Lifetime mortgage plans give you a variety of choices, making your life so much easier. This is unlike other types of equity release plans. You can now choose from this wide range of options for the perfect one. Some of these options are:
- Lump-sum, interest-only
- Buy to let (BTL)
- Retirement interest-only
How Does It Work?
Taking out this interest-only lifetime mortgage plan depends on the same principles as standard lifetime mortgages – meaning you have to be 55 years old or older. You also need to own a house valued at a minimum of £70,000.
The loan-to-valuation formula is based on the youngest applicant and the market value of your property. Therefore, you can release more equity when you’re older because your life expectancy is shorter.
Even though it might appear to be contrary to interest-only schemes’ requirements, some elements within this mortgage plan allow you to change to a roll-up plan later in your life, which is an adequate safeguard.
How Much Do I Need To Repay Monthly On My Interest-Only Lifetime Mortgage?
Once again, it’s up to you how much interest you want to pay monthly. However, the amount must meet your provider’s terms and conditions. There aren’t formal affordability tests done for this type of lifetime mortgage, but you should ask your equity release adviser how much is sensible to repay each month.
It’s so important!
Always discuss any changes to your salary, the value of the estate you’ll leave behind and the balance of your lifetime mortgage loan.
Let’s take a closer look…
Pros & Cons Of Interest-Only Lifetime Mortgages
Some people are worried about interest rolling up1. If that’s you, interest-only lifetime mortgages are an excellent way to go.
You make month-to-month interest payments. If you’re able to do this throughout the life of your mortgage, you won’t be charged additional interest when it ends. So, only the first amount of money you borrowed will be charged interest.
Let me tell you:
People who earn a reliable extra salary and prefer to pay their lifetime mortgage plan to prevent rolled-up interest like this mortgage plan. With this mortgage, you can get as much equity from your property as possible. Those who aren’t eligible for a residential mortgage once they retire also take out an interest-only mortgage plan. It’s very similar to the residential interest-only mortgage plan.
4 Pros of Lifetime Interest-Only Mortgages
- Your loan amount decreases as you pay off interest
- It maximises the money in your home and your heirs’ inheritance
- There aren’t any affordability or income checks
- Sometimes you can change to a roll-up plan if you don’t want to make monthly payments
4 Cons of Lifetime Interest-Only Mortgages
- You’ll have to repay the interest rates with your salary monthly
- Early repayments are penalised
- Your inheritance will be worth less
- Your state means-tested benefits may be affected
Is The Value Of My Property Safe?
All lifetime mortgage providers who are members of the ERC (Equity Release Council2) have a ‘no negative equity guarantee’. It protects you so that you don’t pay more than you owe to your equity release provider. However, when your lifetime mortgage plan comes to an end, the lender will sell your house and settle the loan amount plus any interest.
If the estate market value decreases and the money can’t repay your mortgage, the lender won’t request more cash from your estate or heirs. Since you’ll be protected by the ‘no negative equity guarantee’, they aren’t legalised to do so. Therefore, consider the equity release firm that will offer you this protection.
An interest-only lifetime mortgage can also help manage the total amount owed as you repay all or some of the interest monthly.
But how do you calculate the amount you’ll be able to loan? There’s a calculator specifically designed to help you with that.
How Do I Use The Interest-Only Equity Release Calculator?
The amount of money you release through an interest-only mortgage will differ from provider to provider. However, it’s possible to get an estimated amount with the help of this calculator. It’ll calculate your estimated loan amount if you have an interest-only equity release plan.
Well, you’ll need to provide the calculator with a few crucial details about yourself. But don’t worry, it’s perfectly safe to do so. Firstly, it’ll ask for the value of your house. Since mortgages have to do with your property, the value of your home is significant to know. The loan provider will send someone to your house to evaluate its worth. However, if you haven’t had your property evaluated, simply input your home’s market price for now.
Secondly, the calculator will ask your age, the person’s name taking out the loan and contact details. Simple as that! You’ll then be provided with the estimated loan amount of an interest-only mortgage.
- Fixed interest rates and a monthly repayment plan.
- When you repay the interest off your interest-only plan continually, you’ll end up saving money in the long run.
- You retain 100% ownership of your property.
- The mortgage plans run for life, and your loan is repaid when you die.
- If you move into a new house, you can transfer the interest-only plan to the new property.
- It’s very flexible. You can change from an interest-only plan to a roll-up plan – so you stop repaying monthly.
- Your inheritance is affected– it decreases the value of the estate you pass on to your heirs.
- It can affect the means-tested benefits you have.
- Interest repayments get added to your overall monthly charges.
- Interest rates might be higher standard lifetime mortgages’ interest rates.
- The loan amount is limited.
Interest-only lifetime mortgage providers were initially required to ensure affordability, so you needed to give them proof of an income. The FCA changed this rule, so that’s not a requirement anymore. The great thing about these plans is their level of interest you repay your provider. You determine the interest (fixed limits), and you need to meet the terms and conditions of the provider’s plan.
The contributions you make are dependent on elements like your income, the amount of inheritance you want to hand over, and the amount you borrowed. You pay it via direct debit. If you choose a cheaper payment plan the interest rates, there will be ‘roll-up’ interest. However, this will be less than if you didn’t repay anything.
People mostly repay the interest monthly on their lifetime mortgage rates, but those rates are determined by your specific provider and their terms and conditions as well as the value of your loan and your age.
It’s a great idea, depending on your needs and your circumstances. Ask advice from a financial adviser to figure out if it’s the best option for you or not.
It’s relatively easy to determine what amount you can get when you take out an interest-only mortgage through an equity release provider. You simply need to input a few details, and there you have it!
It’s a great and flexible option if you need to borrow some extra or much-needed cash. If you’re still considering whether or not interest-only mortgages are for you, feel free to contact us with any further questions.