Interest Only Lifetime Mortgage Versus Equity Release Schemes – the Winner Is?September 25th, 2013
Compare an interest only lifetime mortgage such as the Stonehaven Interest Select mortgage to an equity release scheme where the interest rolls up; there is no one clear winner…or is there?
The fact is that suitability of a scheme depends entirely on individual needs, circumstances and attitudes. An experienced mortgage adviser will be able to assess the client’s situation carefully and help you find the right mortgage balance. However, let us consider some broad pros and cons of both interest only lifetime mortgages as well as equity release mortgage plans.
Whether a lifetime interest only mortgage works for you, or an equity release scheme does depends mainly on two factors – your attitude towards risk, and whether you wish to protect your estate and leave behind an inheritance for your beneficiaries when you die. Both schemes work differently, and will affect your estate in different ways. An interest only mortgage requires monthly payment of the interest to the lender, usually by direct debit. This is the monetary amount based on the amount outstanding and the interest rate levied by the lender.
Therefore, paying off this sum each month will make the balance on the mortgage remaining the same until the end of the term. This could be for a set number of years or over one’s lifetime.
Knowing what the balance will be in the end is an important factor for those who want to protect their estate and leave an inheritance for children or family. For those who do not have children or do not wish to leave an inheritance behind, this may not be an important consideration, and an equity release scheme may therefore offer a better deal.
While the balance on an interest only mortgage like the Halifax Retirement Home Plan mortgage remains the same, this is not the case with standard equity release schemes or lifetime mortgage as they are correctly called. The interest on a roll up lifetime mortgage gets added to the balance and compounds over the years; thus increasing the balance significantly over time. In fact as an average at today’s rates the balance will approximately double every 11 years. This erodes the estate and can have a significant impact on any inheritance one may wish to leave behind.
However, do not despair as there are certain protection features built into all equity release schemes that are members of the Equity Release Council. One is the no negative equity guarantee that ensures no matter what, the beneficiaries can never end up owing more than the value of the property.
A mortgage like the former Halifax pensioner mortgage (interest only lifetime mortgage) required monthly repayment of the interest and was only suitable for those who had sufficient income to sustain this type of mortgage. This has now been superseded by the Stonehaven scheme which has the benefit of a fixed rate of interest for life. Something Halifax could never offer in the past and reassuring for those who may be concerned about future interest rate hikes. For someone who cannot afford the monthly payments on their retirement income, an equity release scheme may make more sense. Equity release schemes currently offer more incentives and breaks for setting up such as free valuations, £1,000 cash back deals and no application fees.
Another factor to consider is the length of the mortgage. If one anticipates paying off the mortgage within a relatively short period of time, an interest only mortgage may be a better option as the early repayment penalty on interest only mortgages may be lower than for equity release schemes. However, check with your financial adviser first as early repayment charges can be hefty if you get caught out.
Each type of mortgage has its own advantages and disadvantages. If it is a niche mortgage like the Stonehaven Interest Select mortgage or a standard roll up lifetime scheme, whether it will suit you depends on your individual circumstances such as income, age and whom you wish to leave your residual estate. It is therefore important to understand the terms of the scheme and your own circumstances carefully before making a decision. A mortgage specialist may be able to help you find the most suitable option to meet your needs.
For comprehensive mortgage advice, call your local independent mortgage advice centre on 0800 678 5159 today.