How is an Equity Release Interest Only Provider Ever Repaid?September 25th, 2013
An interest only lifetime mortgage is a special type of equity release plan. It’s essentially like a regular residential mortgage, but there is no fixed term and you only need to make monthly interest repayments. Interest Only Lifetime Mortgages have become more and more popular over the past few years, as they allow clients more control on how the loan is repaid.
To understand how an interest only lifetime mortgage provider is ultimately repaid, it is essential to understand what equity release is. Equity release is basically a way for people over the age of 55 to release some or all of the equity tied up into a property without selling the property or downsizing.
There are two main types of equity release mortgages – home reversion schemes and lifetime mortgages. Home reversion schemes involve selling a portion of the property to the provider. The property is sold when the client dies or moves into a long term care home which is when the provider recovers their share of the property value depending on the proportion they own.
In case of lifetime mortgages, the term of the plan is similar to home reversion plans, i.e. the plan can go on until the client dies or moves into permanent care. At this point the property is sold and the loan amount, which includes the original amount released plus the interest, if any, is recovered by the lender.
Interest only lifetime mortgages offer a way to repay some or all the interest each month, and potentially keep the balance on the loan constant until the end. Whatever interest is unpaid automatically gets added to the balance, and it is also possible to convert an interest only lifetime mortgage into a roll up equity release mortgage.
The balance on an lifetime interest only mortgage is repaid once the mortgage ends. This usually happens either when the client dies or moves into long term care. This is when the property is sold and the loan amount is recovered by the lender. Sometimes people may decide to sell the property earlier for any reason – in that case the mortgage ends when the client sells the property and the amount is recovered from the sale value.
So, interest only lifetime mortgages, indeed, any type of lifetime mortgages are repaid when the mortgage ends and the property is sold. While lifetime mortgages have no fixed loan term, the expected loan term is based on the expected life expectancy of the applicant. Lending to a healthy 55 year old applicant is likely to mean a longer mortgage term than lending to an 80 year old individual in ill health.
When it comes to a loan, the longer the term of the loan, the more the risks involved for the lender. This is mainly the reason why lenders are more reluctant to lend to a younger and healthy individual than someone older and in poor health.
Interest only lifetime mortgages are equity release products – and involve releasing equity or borrowing money against the equity built up into a house. As with most other equity release products, the loan is repaid once the term ends and the property is sold.