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Interest Only Lifetime Mortgage

A Complete Guide to Interest Only Lifetime Mortgage

I think you’ll agree with me when I say…

There’s a lot to learn and understand when it comes to lifetime mortgage plans.

However, sometimes it’s challenging trying to comprehend the ins and outs of the schemes given the variance in features and benefits – that’s where this guide comes in.

With more than a hundred hours of research, eight expert consultations and consumer considerations, this guide will give you an exhaustive deep-dive into the features, pros and cons, and the mechanics of interest-only mortgages.

If you, however, don’t feel like this is the perfect plan for you, then ensure that you check out the guide on ‘Types of Equity Release Schemes’ and carefully evaluate the plan that suits your needs best.

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What is an Interest-Only Lifetime Mortgage?

Interest-only lifetime mortgages are relatively new in the equity release market, and they allow you to pay the interest due every month – meaning that the size of your loan repayment never shoots up.

Therefore, if you are worried about interest rolling up on your plan, then this plan is the ideal option for circumstances.

If you have a reliable surplus income and would prefer to service the interest charged on your lifetime mortgage scheme and avoid it compounding, then this is the type of lifetime mortgage scheme that can help you retain as much equity in your residence as possible – thus maximising the inheritance you will leave your family.

The plan is mostly popular with persons who can’t get a conventional mortgage upon retirement, since the scheme theoretically, works in the same manner as the residential interest-only mortgage.

How Does an Interest-Only Lifetime Mortgage Work?

Taking out an interest-only lifetime mortgage is dependent on the same set of principles as those of the standard lifetime mortgages – meaning you need to be aged 55 or over and own a property with a minimal worth of £70,000.

The loan-to-valuation formula is centred on the age of the youngest applicant and the market value of your estate. Therefore, the older you are, the more equity you can unlock since your life expectancy is low.

That can seem contrary to the requirements of an interest-only scheme. However, there are elements within some these schemes that can allow you to switch to a roll-up plan at a later stage, which acts as a safeguard.

To find how much you can borrow, check out and use our free calculator.

Key Features of Interest-Only Lifetime Mortgage Plans

An interest-only lifetime mortgage scheme has a few key elements that distinguish it from other equity release schemes. These factors include:

  • You only have to repay the interest – so the amount you owe is the initial amount borrowed, thus it doesn’t go up or down
  • It doesn’t have an upper age limit – you just need to be over 55
  • You can get the fixed interest rate option– unlike other schemes that have either a fixed or variable rate, the interest-only plan helps you plan your retirement finances with the fixed rate option
  • It doesn’t involve an end date – you repay the loan when you pass away or move into long-term care
  • You opt to stop paying the loan any time – you will still reside in your home, but the on-going interest will be added to your debt from that point, thus effectively becoming a roll-up lifetime mortgage

The Benefits of Interest-Only Lifetime Mortgages

The latest addition to the equity release market has some key features that make it a popular lifetime mortgage plan. Some of the elements include:

  • It offers you a fixed interest rate and monthly payment plan, with no affordability or income checks needed
  • When you continually repay the interest off your interest-only plan, it will assist you in maintaining a level mortgage balance. You will only reimburse the primary amount you borrowed once the life of the plan ends
  • You get to retain 100 per cent of your property, along with an escalation in its future value
  • The schemes run for your lifetime, and you only get to repay the loan upon death or moving into long-term care
  • If you are move house, you can move the interest-only plan across, subject to the home meeting your plan provider’s conditions
  • The plan also offers you a flexible option which allows you to switch from interest-only to roll-up – so you can stop making monthly payments

The Pitfalls of Interest-Only Lifetime Mortgage Schemes

Like with most equity release products, there are always certain limitations you will encounter. They include:

  • It affects inheritance – it reduces the amount of equity you leave your family  
  • It can affect your means-tested benefits – before taking out the plan, be sure to consult your trusted financial advice
  • The interest repayments add up to your overall monthly spending – unlike other equity release schemes where you don’t pay any monthly repayments
  • The plan’s interest rates tend to be higher than those of standard lifetime mortgages – because they’re mostly the fixed options, interest-only lifetime mortgage interest rates tend to be high
  • You can’t take one out unless your residence is mortgage-free – if you do, you need to borrow enough to clear any existing mortgage or secured loan you have
  • The amount of equity you can unlock is limited – it’s a proportion of your estate’s value based on your age. If you need additional capital, you can always seek out other mortgage options

How Much Does One Have to Repay Monthly With an Interest-Only Lifetime Mortgage Plan?

Since their establishment, interest-only lifetime mortgage lenders were initially required to make sure of affordability, and therefore, you needed to produce proof of income.

However, with market changes and significant alterations in the set laws, the FCA turned this rule around, and now you do not have to go through income or affordability checks.

The unique factor about these schemes is that the level of interest you pay back to the provider is determined by you (within set limits) –as long as you meet the terms and conditions of the plan.

You also get to choose your level of contribution. With assistance and proper guidance from your financial adviser, you can get to make an informed decision since this can affect the inheritance you leave.

The contributions you make are dependent on elements like your income, the amount of inheritance you want to leave, and the amount you borrowed. You pay the monthly contribution via direct debit.

If the payment plan you choose is lower than the interest charged, there will be an element of ‘roll-up’. However, this will be lower than if you didn’t make any payments.

The most popular option with the interest-only lifetime mortgage plans is fully repaying the interest on a monthly, thereby maintaining a level mortgage balance.

Unlocking equity from your family home can be a nerve-wracking decision. Make sure that you carefully understand what the plan entails and you will ensure you have an effortless time in your retirement and always get a second opinion from an expert!

If you need more information on equity release and other plans, be sure to click here and see how much equity you can release and also get to chat with an expert for free.

How much money could you release?

A lifetime mortgage plan allows you to access the value of your home, tax-free without having to sell up, so that you can have money to spend on whatever you want or need.

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