Is an Optional Payment Lifetime Mortgage still relevant in 2025?

You will want to know since homeowners aged over 55 are sitting on over £2.5tln of property wealth?¹ 

At SovereignBoss, we strive to be a reputable source of financial information, aiming to simplify complex matters like this for our readers. 

Throughout this article, we will explore the workings, pros, and cons, eligibility, and the potential impact of an optional payment lifetime mortgage on your life and legacy.

What is an Optional Payment Lifetime Mortgage?

An Optional Payment Lifetime Mortgage (OPLM) is a form of equity release, introduced by Legal & General in 2018,²  that allows you to borrow a sum of money against the value of your home, which is repaid when the home is sold. 

Unlike other older lifetime mortgages, the optional payment element gives you the flexibility to choose whether to pay some, all, or none of the monthly interest.

As of March 2022, all new lifetime mortgages taken out with an Equity Release Council member now come with the guaranteed right to make voluntary, penalty-free partial repayments, subject to lending criteria.³

How Does an Optional Payment Lifetime Mortgage Work?

With an OPLM, you can make voluntary payments starting from £25 to 100% of the interest amount each month, without incurring any early repayment charges.⁴ 

These payments could be in the form of monthly interest or capital repayments, providing you greater control over the final debt.

You are also able to make annual payments of up to 10% each year of the loan amount, as this is now required by the Equity Release Council for all lifetime mortgage products.⁵

There is no obligation to make the payments, but remember that the interest will roll up and affect the total amount owed at the end of the loan term.

Are There Any Fees Associated With an Optional Payment Lifetime Mortgage?

Obtaining an Optional Payment Lifetime Mortgage, like any financial product, does come with associated costs. 

It is important to be aware of these fees to ensure a comprehensive understanding of your financial commitment. 

Key costs you may encounter:

• Arrangement Fee: This is a fee charged by the lender for the administration involved in setting up your mortgage. 
• Valuation Fee: A valuation of your property is required to establish its current market value and determine how much you can borrow. The lender typically arranges this, but the cost is generally passed onto the borrower.
• Solicitor's Fees: Legal representation is necessary when finalising a mortgage agreement. Solicitors handle the legal aspects of the transaction and their services come with a fee.
• Advice Fees: If you choose to consult with a financial advisor to help navigate your decisions around this mortgage type, you may need to cover the cost of their professional advice.

Remember, these costs can differ from lender to lender, so it is essential to factor them into your decision-making process when choosing the right plan for your needs.

How Does the Interest Work on an Optional Payment Lifetime Mortgage?

Interest on an Optional Payment Lifetime Mortgage (OPLM) operates similarly to other loans but with a key distinction. 

With an OPLM, similar to many other loans, the interest is 'compounded' or 'accrued'. 

This means that you are not just charged interest on the initial amount you borrow (the principal), but also on the accumulated interest over time. 

Consequently, the amount you owe can increase substantially over time because your are effectively paying 'interest on the interest'. 

However:

An OPLM introduces a unique flexibility; the ability to make voluntary repayments. You can choose to pay back some of the interest whenever it suits you. 

By doing this, you can reduce the amount of interest being added to the loan over time, thereby controlling the overall growth of the loan.

This option to make interest repayments offers an advantage that was not present in all equity release plans until recently, allowing you to proactively manage the size of the loan.

Consider:

On 28th March, 2022, the Equity Release Council's new standard made the option to make voluntary, penalty-free payments a standard feature for all new lifetime mortgages, based on lender-specific criteria.

As always, your personal financial situation should guide the decision to make these repayments. 

Professional advice is beneficial to fully understand the features and implications of an OPLM.

What Is the Difference Between an Optional Payment Lifetime Mortgage and a Standard Equity Release Plan?

While both Optional Payment Lifetime Mortgages (OPLM) and standard equity release plans allow homeowners to release equity from their property, the key difference lies in repayment structure.

In a standard equity release plan, no repayments are required until the end of the loan term, allowing the interest to accumulate or 'accrue' over the life of the loan.

Conversely, an OPLM offers the flexibility to make voluntary repayments towards the interest. 

This control can help manage the overall loan growth and potentially reduce the final debt, setting an OPLM apart from a typical equity release plan taken out before the end of March 2022.

Why Did Legal & General Design the Optional Payment Lifetime Mortgage?

Legal & General introduced the Optional Payment Lifetime Mortgage (OPLM) to address customer concerns and provide a more flexible equity release solution. 

They recognised that homeowners wanted to reduce the impact of interest roll-up on their estate and have the option to manage their loan balance through voluntary repayments. 

The OPLM allows homeowners to mitigate interest accumulation and preserve more of their property's value for inheritance. 

The practice of optional repayments has since been standardised for all new lifetime mortgages offered by members of the Equity Release Council. 

What are the Pros and Cons of an Optional Payment Lifetime Mortgage?

The pros and cons of an OPLM include the flexibility to manage your loan balance although it still reduces the value of your estate and the inheritance you can pass on to your heirs. 

More pros and cons:

Pros

Here are additional advantages of an Optional Payment Lifetime Mortgage:

• Flexibility to Manage Your Loan Balance: One of the significant advantages of an Optional Payment Lifetime Mortgage (OPLM) is the flexibility it provides in managing your loan balance. You have the option to make voluntary repayments towards the interest. This flexibility allows you to actively control the growth of your loan, potentially reducing the final debt.
• No Need to Move Out of Your Home: With an OPLM, you retain ownership of your home. There is no requirement to move out or sell your property during your lifetime.
• No Mandatory Monthly Repayments: Unlike traditional mortgages, an OPLM does not require you to make mandatory monthly repayments. This can provide financial relief for homeowners who prefer not to have the burden of regular repayments and who want to manage their finances more flexibly.

Cons

The cons of an OPLM may include: 

• Substantial Repayment Amount: It is important to note that over time, the total amount to repay on an OPLM can become substantial, depending on factors such as interest rates and the value of your home. The interest 'accrues' or compounds over the life of the loan, meaning the longer the loan remains outstanding, the more interest is added to the balance.
• Impact on Means-Tested Benefits: Taking out an OPLM could potentially affect your eligibility for means-tested benefits. The additional funds received from the loan could be considered as an asset and may affect the calculation of your benefits. It is crucial to consider this impact and seek professional advice to understand the potential consequences.
• Reduction in the Value of Your Estate: Opting for an OPLM will reduce the value of your estate, as the loan plus accumulated interest must be repaid from the proceeds of the eventual sale of your property. This reduction in your estate's value can impact the inheritance you leave behind for your loved ones.

As with any financial decision, it is essential to carefully consider the pros and cons, consider your personal circumstances, and seek professional advice to determine if an Optional Payment Lifetime Mortgage is the right choice for you.

Are You Eligible for an Optional Payment Lifetime Mortgage?

To be eligible for an Optional Payment Lifetime Mortgage, you typically need to be aged 55 or over, own a UK-based property with a minimum value of £70,000, and the property should be your main residence. 

Other criteria include:

• Properties such as flats, ex-council, ex-Ministry of Defence, maisonettes, or ex-housing association will require a minimum value of £100,000
• Your home must be of a standard construction
• It must be in a good state of repair
• There should be no tenancy restrictions in place

What Properties Are Not Eligible for an Optional Payment Lifetime Mortgage?

As a rule, if the property does not meet the minimum value, or is in a state of disrepair, it will not qualify.

Other property types that may not qualify are:

• Bedsits
• Leaseholds with an insufficient lease length
• Tied to agriculture
• Have an outstanding mortgage that is larger than the loan amount
• Partially freehold flats

The Impact of Optional Payment Lifetime Mortgage on Inheritance

With an OPLM, the loan and any accrued interest are repaid from the sale of your home after you pass away or move into long-term care. 

This will reduce the inheritance you leave to your beneficiaries. 

However, making voluntary repayments can help manage the final loan size.

Legal & General also offers Inheritance Protection on this product, which will help to protect the legacy you wish to pass down to your heirs.

Common Questions

In Conclusion

An Optional Payment Lifetime Mortgage offers homeowners aged 55 and over a flexible solution to access the equity tied up in their property. By providing the option to manage interest accumulation on the capital loan, it enables borrowers to reduce their total owed amount.

With the recent introduction of the new Equity Release Council standard allowing for voluntary partial repayments, some may question the relevance of OPLMs. 

However, it is crucial to fully understand how all lifetime mortgage products function and seek advice from a qualified financial advisor to make an informed decision aligned with your long-term financial goals.

Lifetime mortgages have significant implications for your estate's value, future plans, potential to relocate, and may also impact your tax position and welfare benefits. 

As every individual's circumstances are unique, what works excellently for one person may not be ideal for another. Therefore, carefully consider how an Optional Payment Lifetime Mortgage aligns with your personal financial situation and future aspirations.