Should you get an interest only lifetime mortgage?

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If you’ve reached retirement age and you need access to funds to help with your expenses or help a loved one on to the property ladder, you’ve likely come across interest-only lifetime mortgages. This is one of the types of lifetime mortgage products available in the UK, and you should be aware of its benefits and risks before making a decision.

What is an interest-only lifetime mortgage?

A lifetime mortgage is a type of equity release that allows you to borrow money against your property. Usually, those funds are paid to you in one lump sum or through a series of small payments that you can choose.

Interest only lifetime mortgage

The issue is that these types of lifetime mortgages increase your total mortgage due to interest roll-up.

The issue is that these types of lifetime mortgages increase your total mortgage due to interest roll-up. So, unlike a lump sum or drawdown lifetime mortgage, where you pay back the loan plus the interest when you sell your property, you’ll make monthly payments to cover the interest on the lifetime mortgage. This means that you won’t have any extra costs to pay at the end of your plan, just the total amount you borrowed.

Note that to qualify for an interest-only lifetime mortgage, you’re still expected to meet the exact requirements of a standard lifetime mortgage policy. This includes:

  • You’ll need to be at least 55 years of age (some companies set the minimum at 60).
  • Your property needs to have a value of at least £70,000.
  • You need to release a minimum of £10,000 (this figure depends on the company you choose).

What are the benefits of an interest-only lifetime mortgage?

If you have decent income coming in every month and you feel like you can cover the interest of your lifetime mortgage, you should consider this option to lower the final payment at the end of your plan. This will help you retain as much value of your property as possible, unlike other types of lifetime mortgages where the amount you’d leave as an inheritance would be much lower.

Here’s an overview of the benefits of lifetime mortgages and how they can help you in retirement:

  • You can set a fixed interest rate for life so you know how much you’re paying each month.
  • You’ll receive more equity on your property at the end of your plan.
  • You still retain complete ownership of your property.
  • Some companies allow you to switch to a roll-up interest plan if you stop making monthly payments.
  • You only repay the amount borrowed when you pass away or go into care.

How much money can you release through an interest-only lifetime mortgage?

The amount you can release against your property will depend on the value of your home and your age. To get a proper estimate, you should contact a lender or mortgage advisor to discuss your options.

Here’s an estimate that gives you a better idea of the costs involved:

  • A 70-year old applicant with a property valued at £400,000 can release £104,650 at 2.93%. The maximum this applicant could release is £184,000 at 6.32%. With an interest-only lifetime mortgage, you would pay the cost of the interest every month so that at the end of your plan, you only pay the loan amount.

Note that your quote will likely be different since rates differ by company. Make sure to discuss your requirements with an advisor before making a decision.

What are the risks of an interest-only lifetime mortgage?

We compare plans from the leading equity release providers

There are some factors that you should take into account before deciding on an interest-only lifetime mortgage, including:

  • Borrowing against the value of your property means that the amount you leave as an inheritance will be lower.
  • You’ll be subject to an early repayment fee if you want to pay off early.
  • Your mortgage will increase due to roll-up if you switch over to a standard lifetime mortgage.

To avoid any unwelcome surprises, you should be thorough in your research, and you should employ professional help to guide you through the best plan for your circumstances

Can you get an interest-only lifetime mortgage if you already have a standard mortgage?

The short answer is yes. You are allowed to apply for any lifetime mortgage if you still have an existing mortgage. However, the lender will ask you to use part of the funds from your lifetime mortgage to pay off the remaining balance of your standard mortgage. As a result, if you still have a significant amount to pay, a lifetime mortgage might not be the most efficient way to access funds.

Where can you find a good interest-only lifetime mortgage deal?

It would be best to go through a price comparison site or use a broker to help you land the best possible deal. These services will search the market for the best rates and save you money in the long run.

Can you pay off your interest-only lifetime mortgage early?

An interest-only lifetime mortgage is designed to be paid off when you pass away or go into care. As a result, it’s not optimal to try and pay off your mortgage early. Still, it’s understandable if your circumstances change and you need to exit your plan.

In this case, the lender will likely charge you an early repayment fee to recoup any potential losses relating to your contract. You should consider how much the fee will be and whether it’s in your interest to exit the contract.

Is an interest-only lifetime mortgage the right product for you?

An interest-only mortgage is a fantastic option if you have an income surplus and are confident you can make the monthly interest payments. It means that you retain more equity on your property at the end of your plan and a larger inheritance for your loved ones.

If you feel like you can’t manage the monthly payments in addition to your expenses, then you can opt for an interest roll-up plan where you don’t have to pay anything until the end of your plan.

Lifetime Mortgages