Interest Only Lifetime Mortgage

Are You Considering an Interest-Only Lifetime Mortgage in 2022?
Contributors: Nicola Date, Katherine Read. Edited by Rachel Wait & Reviewed by Francis Hui
Are You Looking To Unlock Funds With an Interest-Only Lifetime Mortgage? Discover How It Works & the Eligibility Criteria. Keep Reading to Find Out More.

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An Interest-only lifetime mortgage might just be the product you’ve been waiting for!

If you’ve been hesitant to get a lifetime mortgage because you want to leave your heirs something one day, then its for you.

With the option to make interest repayments, you’ll have more to leave to your loved ones.

As experts in our field, we discuss the following in this article:

    Our expert panel of journalists spends countless hours researching new products in the later-life lending space to ensure that our readers always have credible information.

    Read more now!

    What Is an Interest-Only Lifetime Mortgage?

    An interest-only lifetime mortgage is a loan that’s secured against your primary home.

    Unlike a standard lifetime mortgage, you’ll have mandatory monthly interest payments.

    It allows you to access the capital tied up in your property, and you’ll still retain homeownership.

    How Does an Interest-Only Lifetime Mortgage Work?

    An interest-only lifetime mortgage works in a very similar way to a standard interest-only mortgage, but it’s only available to those aged over 55.

    With an interest-only lifetime mortgage, the capital you borrow is secured against your home. 

    You make monthly repayments on the interest amount, not on the loan’s capital value.

    By paying the interest portion of the loan monthly, the capital value you owe will never increase.

    Interest-only lifetime mortgages don’t have a set term. The loan value is repaid when you pass on or move into permanent care, and your home is sold.

    Why Might You Need an Interest-Only Lifetime Mortgage?

    You might need an interest-only lifetime mortgage in your later years as we live in an age where our life expectancies have risen, and we need access to capital.

    It’s difficult to get a standard mortgage as you get on in years, so an interest-only retirement mortgage designed for retirees is a perfect product to fund your later-life needs.

    You’ll be able to use the tax-free funds that you get from an interest-only mortgage as you wish.

    Benefits of an Interest-Only Lifetime Mortgage

    The benefits of an interest-only lifetime mortgage are that the interest rate you get can be fixed for the lifetime of your loan, and only interest is paid monthly.

    Your outstanding loan balance will never increase if you keep up your monthly interest payments.

    With some interest-only lifetime mortgage plans, you can take out an inheritance guarantee that will allow a portion of your home’s equity to be set aside for your heirs.

    Certain plans allow you to add a drawdown option so that you can access additional capital at a later date if you need it.

    Another benefit of an interest-only lifetime mortgage is that you can switch it to a regular lifetime mortgage if you can’t afford the monthly repayments anymore.

    Risks of an Interest-Only Lifetime Mortgage

    The risks of an interest-only lifetime mortgage are that even though you don’t pay tax on the funds, your tax position may change, and your eligibility for benefits can be affected.

    Other risks include that the amount of inheritance you can leave to your heirs one day will be affected by the amount of equity you release from your property now.

    Property prices in the future might fluctuate, and if you want to settle your mortgage, you might face early repayment charges.

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    Eligibility for Interest-Only Lifetime Mortgage Schemes

    Your eligibility for an interest-only lifetime mortgage will be subject to an affordability assessment to make sure you can keep up with the monthly interest repayments.

    Other eligibility criteria are:

    • You need to be aged 55 and over.
    • Your home needs to be worth over £70,000.
    • Your property has to be in the UK.
    • Your property has to be of standard construction.

    Your eligibility can be affected by your credit record if you have any bad credit, as well as the state of your health.

    Lifetime Mortgage Rates

    Lifetime mortgage rates are calculated based on your age and your property values.

    The interest rate you’re offered is usually fixed for your lifetime.

    Lifetime mortgage rates currently range between 4% and 5%.

    How Is Interest Calculated on a Lifetime Mortgage?

    Interest on a lifetime mortgage is calculated based on a fixed rate.

    The interest is compounded1 on a lifetime mortgage, which is calculated on the loan value with the previous period’s interest added to it.

    The compounded interest is usually added to the loan amount annually. 

    What Are the Best Rates for Interest-Only Lifetime Mortgages?

    The best rates for interest-only lifetime mortgages are currently between 2.99% and 4.24%.

    Are There Any Alternatives to an Interest-Only Lifetime Mortgage?

    There are alternatives to interest-only lifetime mortgages.

    These include roll-up lifetime mortgages, drawdown lifetime mortgages, flexible lifetime mortgages, enhanced lifetime mortgages, and home reversion plans.

    Here we look at these.

    Roll-up Lifetime Mortgage

    With a roll-up lifetime mortgage, there are no monthly payments.

    Your loan capital value and full interest amount are settled when your property is sold if you pass away or move into long-term care. 

    Drawdown Lifetime Mortgage

    A drawdown lifetime mortgage works similarly to a roll-up lifetime mortgage.

    You don’t receive a big lump sum; you receive an upfront amount and reserve funds in a drawdown facility that you can withdraw from when you need more money.

    Flexible Lifetime Mortgage

    A flexible lifetime mortgage is similar to a roll-up option; however, you can choose to make voluntary payments to decrease your loan amount.

    Enhanced Lifetime Mortgage

    An enhanced lifetime mortgage is only available to retirees with serious medical conditions, which means their life expectancy is shortened.

    It allows them to release a higher percentage of equity from their homes at better rates.

    Home Reversion

    With home reversion plans, you sell all or part of your home to a home reversion provider for less than you would realise if you sold your home.

    In exchange, you receive a tax-free cash lump sum in exchange for lifetime tenure. 

    Other Types of Lifetime Mortgage

    The other types of lifetime mortgages include retirement capital and interest mortgages and interest-only tracker mortgages.

    A retirement capital and interest mortgage allow you to pay back the capital and interest just as with a standard mortgage and has a fixed term.

    An interest-only tracker mortgage works similarly to a retirement interest-only mortgage, the difference being that the interest rate is not set and changes with the market.

    Some lenders now offer a product that combines equity release and an interest-only lifetime mortgage.

    It allows you to pay the interest or to stop payments and add the interest to the mortgage if you wish.

    Why You Should Speak to an Expert Interest-Only Lifetime Mortgage Broker

    You should speak to an expert interest-only lifetime mortgage broker because they’re able to access products from the whole market in order to fill your requirements.

    They’re normally Online Mortgage Adviser2 (OMA) accredited and have undergone training through the London Institute of Banking and Finance (LIBF).

    They can offer you expert advice that is tailored to your situation.

    Who Offers Interest-Only Lifetime Mortgages?

    Interest-only lifetime mortgages are available from banks3, building societies and other traditional mortgage providers.

    How Do I Apply for an Interest-Only Lifetime Mortgage

    To apply for an interest-only lifetime mortgage, you should consult with your accredited financial adviser.

    They’ll conduct a full financial analysis with you and then advise you on the best product for you.

    Is an Interest-Only Lifetime Mortgage Right for Me?

    An interest-only lifetime mortgage could be right for you if you need later life financing and you’re happy to make repayments on a monthly basis.

    It could also be right for you if you need some cash to help your family, but you don’t want to impact the inheritance; you leave them too heavily.

    Are Interest-Only Lifetime Mortgages Still Relevant in 2022?

    An interest-only lifetime mortgage is still relevant and is, in fact, a reasonably new lifetime mortgage product.

    It’s a great lifetime mortgage option if you want to keep your loan value fixed and can make interest payments to lower the amount owing when you pass on or move into a care facility.

    Common Questions

    Can I Repay an Interest-Only Lifetime Mortgage Early?

    Are There Any Other Alternatives to an Interest-Only Lifetime Mortgage?

    How Much Do I Have to Repay Monthly With an Interest-Only Lifetime Mortgage?

    Can I Still Obtain a Mortgage in Retirement?

    Do I Need to Pass an Affordability Check to Get an Interest-Only Lifetime Mortgage?

    In Conclusion

    An interest-only lifetime mortgage is a flexible option that will allow you to release equity from your property. 

    The best part is that you don’t have to incur interest costs when you pass away or move into permanent care, so you can protect some of the inheritance you leave your family.

    Before you consider an interest-only lifetime mortgage, we always advise that you seek advice from your financial adviser.

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