What’s a Voluntary Repayment Lifetime Mortgages and How Does It Work in the UK in 2024?
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- A Voluntary Repayment Lifetime Mortgage is a type of equity release scheme that allows you to make optional repayments on your loan during its term.
- This mortgage operates by allowing you to borrow a sum of money against the value of your home, with the option to make voluntary repayments to reduce the loan balance over time.
- The risks associated with it include potentially reducing your estate value, affecting your tax position, or impacting your eligibility for means-tested benefits.
- The benefits of a Voluntary Repayment Lifetime Mortgage include flexibility in managing the loan and reducing the overall cost of the mortgage by making voluntary repayments to lower the interest accrued.
- The key feature is the ability to make voluntary repayments on your loan at your discretion, without incurring early repayment charges.
Are you considering a voluntary repayment lifetime mortgage to reduce the cost of your equity release plan and leave more to your loved ones?
Fortunately, in March 2022, the Equity Release Council implemented a new safeguard that ensures members' clients can make partial loan repayments without facing any penalties.
The downside is that the safeguard only extends to new lifetime mortgages acquired after 28 March 2022.1
So, what if you already have a voluntary repayment lifetime mortgage?
In This Article, You Will Discover:
At Every Investor, we strive to provide current and factual information about the equity release market.
Our team of financial professionals compiles clear and comprehensive articles, designed to aid in understanding various later-life finance planning options.
Read on to find out more about voluntary repayment lifetime mortgages.
What Is a Voluntary Repayment Lifetime Mortgage?
A Voluntary Repayment Lifetime Mortgage is a type of equity release plan, that lets homeowners aged 55 and up access the wealth tied up in their property.
Instead of paying interest monthly, this lump sum loan allows flexible repayments, letting you pay back up to 15% of the initial loan amount each year without incurring early repayment charges.
However, please note, that the decision to opt for a Voluntary Repayment Lifetime Mortgage should be taken after careful consideration and consultation with a financial advisor.
It offers a unique blend of freedom and responsibility, allowing you to effectively manage your finances in retirement, but it could also potentially impact your entitlement to means-tested benefits and your estate value.
What’s a Voluntary Repayment Lifetime Mortgage?
A voluntary repayment lifetime mortgage is a type of equity release scheme that offers payment flexibility.
It allows you to reduce what’s owed at the end of the loan by paying back some of the interest and capital when you have the means to do so.
Different lenders have different policies regarding paying back equity release early; some place restrictions on how much you may repay, while others charge extra costs.2
It’s important to read through the terms and conditions of your plan to understand how your provider handles voluntary repayments.
What Are Voluntary Repayments?
Voluntary repayments are payments that you can make towards your lifetime mortgage without incurring any early repayment charges.
They’re optional and flexible, meaning you can choose how much and how often you want to pay back, as long as you stay within the limits set by your lender.
How Do Voluntary Repayments Work?
Voluntary repayments work by you making occasional payments on your lifetime mortgage, which reduces the amount of interest that accumulates over time.
This means you can lower the final balance that’ll be repaid when your plan ends, either when you die or move into long-term care.
You can also choose whether to repay interest only or both interest and capital depending on your lender’s terms and conditions.
Most lenders allow you to repay up to 10% or 15% of the initial amount borrowed each year, without penalty though some lenders impose a minimum repayment amount per year or payment.3
Why Make Voluntary Repayments on a Lifetime Mortgage?
Making voluntary repayments on a lifetime mortgage can reduce your final debt.
Additional benefits include:
- Lowering the cost of your equity release plan by reducing the interest that builds up over time.
- Increasing the amount of inheritance that you can leave to your beneficiaries by preserving more equity in your home.
- Giving you more flexibility and control over your finances by allowing you to adjust your repayments according to your circumstances.
- Improving your credit rating by showing that you are managing your debt responsibly.
To better understand your repayment options it’s essential to consult a lifetime mortgage advisor or broker.
They’ll be able to explain the repayment options on your current or new plan, as well as any fees or penalties involved.
How Much Can You Repay Voluntarily on a Lifetime Mortgage?
The amount that you can repay voluntarily on a lifetime mortgage will be determined by the terms and conditions of your plan.
Different lenders have different rules and limits on how much you can pay back each year and each payment.
For example, some lenders may allow you to repay up to 15% of the initial amount borrowed each year, however, the limit is typically 10%.4
Some lenders may also have a minimum repayment amount per year or payment, such as £50.5
You should always check with your lender before making any voluntary repayments, as they may have specific requirements or procedures that you need to follow.
You should also consult an independent financial advisor who can help you decide how much and how often to repay, based on your personal circumstances and financial goals.
What Happens if You Can’t Make Voluntary Repayments?
If you can’t make voluntary repayments on your lifetime mortgage for any reason, such as a change in income or health, you don’t have to worry about any penalties or consequences.
It’s optional to make voluntary repayments.
As long as you abide by the terms and conditions of your providers, you can stop or change them at any time without affecting your plan.
Your lifetime mortgage will continue as normal, with interest accruing on the outstanding balance until it’s repaid at the end of the plan.
What Are the Advantages of Lifetime Mortgage With Voluntary Repayments?
The advantages of a lifetime mortgage with voluntary repayments include reducing the amount of interest that accrues, maximising the amount of inheritance you can leave, and having greater flexibility and control of your plan.
Lower Interest Payments
By making voluntary repayments on your lifetime mortgage, you can reduce the amount of interest that accumulates on your loan over time.
This means that you can save money on the overall cost of your equity release plan and pay less interest to your lender.
By making voluntary repayments on your lifetime mortgage, you can preserve more equity in your home and increase the amount of inheritance that you can leave to your beneficiaries.
This also means that you can reduce the potential inheritance tax liability that may arise when your estate is passed on to your heirs.6
Greater Flexibility & Control
Making voluntary repayments gives you more flexibility and control over your finances and debt management.
You can choose how much and how often to pay back, as well as stop or change your repayments at any time, depending on your income, expenses, goals, and your provider's terms and conditions.
These adjustments should align with the agreements of your plan without affecting its overall structure.
What Are the Disadvantages of Lifetime Mortgage With Voluntary Repayments?
The disadvantages of a lifetime mortgage with voluntary repayments include reducing the inheritance you can leave to your heirs, limiting access to additional funds, and affecting your disposable income.
Reduced Equity in Your Home
By taking out a voluntary repayment lifetime mortgage, you’re reducing the amount of equity that you have in your home.
This means that you may not have access to additional funds in the future, if you need them for any reason, such as home improvements, care costs, or emergencies.
In addition, you’ll be reducing the amount of equity you have available to pass on as an inheritance to your heirs.
Additional Fees & Limits
Depending on your equity release provider and the plan you choose, there may be fees involved with making voluntary payments.
As mentioned above, your provider may also set limits on the amount or the percentage of your loan you can pay back within a year.
Less Disposable Income
By making voluntary repayments on your lifetime mortgage, you are increasing your monthly outgoings and reducing your disposable income.
This means that you may have less money available for other expenses or savings, and you may have to budget more carefully to afford your repayments.
It’s vital to run through all of the intricacies of a voluntary repayment lifetime mortgage with a professional equity release advisor or broker to determine whether it’s a financially viable option for you.
Eligibility & Application
To be eligible and apply for a voluntary repayment lifetime mortgage, you need to meet some basic criteria, in terms of your age, property, and outstanding mortgage balance.
You also need to follow some steps, such as contacting an equity release advisor and choosing a lender and a plan.
We’ll go into more detail below.
How to Qualify for a Lifetime Mortgage With Voluntary Repayments
To qualify for a lifetime mortgage with voluntary repayments, you need to meet minimum age and property value requirements.
Here’s a list of the general qualifying criteria:
- You must be at least 55 years old (or 65 for some lenders).
- You must own a property in the UK that is worth at least £70,000 (or more for some lenders).
- You must live in your property as your main residence.
- You must have little or no outstanding mortgage on your property (or use some of the equity release funds to pay it off).7
How to Apply for a Lifetime Mortgage With Voluntary Repayments
To apply for a lifetime mortgage with voluntary repayments involves contacting an equity release advisor or broker and finding a suitable provider and plan.
Here are the general steps you’re likely to follow:
- Contact an independent financial advisor who can help you compare different plans and find the best deal for you.
- Choose a lender and a plan that suits your needs and preferences.
- Fill in an application form and provide the required documents (see below).
- Have your property valued by a surveyor appointed by your lender.
- Receive an offer from your lender, which will outline the terms and conditions of your plan.
- Consult with your solicitor to ensure you fully understand the terms and implications of the contract.
- Sign the offer and return it to your lender.
- Your lender will pay your equity release funds into your solicitor’s account.
What Documents Do You Need to Apply for a Lifetime Mortgage?
To apply for all types of lifetime mortgages, you need to provide some documents to your lender, such as identification and property documentation.
Here’s a list of the documentation you’ll generally have to provide:
- Proof of identity, such as a passport or driving license.
- Proof of income, such as payslips, pension statements, or tax returns.
- Proof of property ownership, such as title deeds or land registry documents.
- Proof of property value, such as a valuation report or recent sales data.
- Proof of outstanding mortgage, if any, such as a mortgage statement or redemption letter.8
A qualified equity release advisor or broker will be able to help you with every step of the process, from deciding whether equity release is right for you, to completing the application.
Their expertise and experience are essential in finding the right plan for your circumstances and navigating the intricacies of the application journey.
Do All Equity Release Plans Now Come With Voluntary Repayments?
No, not all equity release plans now come with voluntary repayments.
There are 2 types of equity release plans, a lifetime mortgage, and a home reversion plan.
Although the Equity Release Council introduced a new standard in March 2022 guaranteeing customers the right to make penalty-free, voluntary payments on all new plans, this only applies to lifetime mortgages.9
Home reversion plans allow you to sell part or all of your home below market value while maintaining your right to live in it rent-free for life (in most cases).
What does that mean?
This type of plan doesn’t require repayments since it involves a sale instead of a loan.
The reversion provider will simply claim their percentage of the sale of the house upon your passing or relocation to a long-term care facility
If you are interested in making voluntary repayments on your equity release plan, you should always check with your lender or advisor before applying.
They can help you find out if this option is available and suitable for you.
Things to Consider
Before applying for a lifetime mortgage with voluntary repayments, there are some things that you should consider carefully.
- The impact of making voluntary repayments on your equity release plan and your future finances.
- The benefits and drawbacks of making voluntary repayments compared to other options, such as interest-only payments or no payments at all.
- The affordability and sustainability of making voluntary repayments over time.
- The terms and conditions of your plan and your lender regarding voluntary repayments.
- The advice and guidance of an independent financial adviser who can help you make an informed decision.
Do All New Lifetime Mortgage Plans Come With Voluntary Repayments?
How Much Interest Do You Pay Back on Equity Release?
Can You Pay off Equity Release Early?
Should You Make Voluntary Interest Repayments on Your Lifetime Mortgage?
Will I Owe More Than My Property Is Worth?
Can I Pay Off My Voluntary Repayment Lifetime Mortgage Early?
Can I Move Home With a Voluntary Repayment Lifetime Mortgage?
What’s the Minimum Age Requirement for a Voluntary Repayment Lifetime Mortgage?
Can I Switch to a Different Lifetime Mortgage Plan in the Future?
How Does the Interest Rate on a Lifetime Mortgage With Voluntary Repayments Compare to a Standard Lifetime Mortgage?
What Is a Voluntary Repayment Lifetime Mortgage?
How Does a Voluntary Repayment Lifetime Mortgage Work?
Are There Any Risks Associated with a Voluntary Repayment Lifetime Mortgage?
What Are the Benefits of a Voluntary Repayment Lifetime Mortgage?
Can I Make Voluntary Repayments on My Lifetime Mortgage?
Voluntary repayment lifetime mortgages offer you the flexibility to actively manage your loan balance, preserve your equity, and potentially leave a larger inheritance.
By allowing you to make voluntary repayments, these mortgages provide a tailored solution for accessing your home equity while retaining ownership and control over your property.
It’s crucial for you to assess your financial situation and seek professional guidance to determine if this option aligns with your goals.
In the right circumstances, a voluntary repayment lifetime mortgage could help secure a comfortable retirement and preserve your legacy.
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