Interest Only Lifetime Mortgages
The Interest Only Lifetime Mortgage product has proven to become almost a lender of last resort in recent years & will probably do so in the future. With many baby boomers now reaching retirement harbouring the remnants of later life mortgages, this age group are looking towards remortgage options to refinance loans where the banks are reigning in their mortgage books. Interest only plans have also proved to solve other retirement needs.
Having been use to managing their debt issues throughout their lives, many feel comfortable knowing their retirement income can still service a mortgage in retirement. As such equity release lifetime mortgage providers have developed a range of plans whereby the interest can be repaid on a monthly basis throughout their life, thus maintaining a level balance. This provides a form of inheritance guarantee for any beneficiaries.
Points to Consider Before Taking An Interest Only Lifetime Mortgage
For many people over the age of 55, obtaining finance can become difficult as lenders will consider their drop in income an issue and the fact it won’t improve, bar inflationary increases over their lifetime. However, the one attribute this age group has is their property in which they have built up significant equity over their working lives.
Expenditures in retirement do not cease. In fact they continue apace with home improvements, new cars, more holidays due to extra leisure time & although the children have left home, they aren’t always financial independent! Therefore, at some point in retirement, unless significant provision has already been made, raising finance will be necessary.
However, we must point out interest only lifetime mortgages should not always be the first port of call as equity release advisers would recommend that other means of capital raising can be achieved without having to resort to lifetime mortgages. For instance you could consider downsizing to raise extra cash, seek any government grants for home improvements, or state benefits if income is lower than the minimum qualifying amount.
Why Choose An Interest Only Lifetime Mortgage?
Although wishing to capital raise is necessary, different people have different attitudes towards their inheritance. Consequently, you need to assess what impact these mortgages for pensioners have longer term & whether this can affect your heir’s inheritance. This is such an important consideration.
The question any qualified lifetime mortgage adviser should therefore ask is –
‘How Important is it to You That You Leave Part or All of Your Property to Your Beneficiaries?’
The answer would help determine the structure of the plan recommended. For instance if it wasn’t important to leave an inheritance, then a roll-up lifetime mortgage may be suitable as there would be no effect to the family budget & the final balance would be of no real significance to the parents.
On the other hand, should an inheritance necessitate preservation then management of the final balance is imperative. The methodology in managing this balance would be by virtue of repaying the interest only element each month by making regular payments, like any residential mortgage. Hence, the introduction of the Interest Only Lifetime Mortgage facilitating this request.
How Do Interest Only Lifetime Mortgages Work?
Interest only lifetime mortgages were introduced under the principle of capital being released based on the age of the youngest homeowner and the valuation of the property. However, in April 2014 the FCA introduced the Mortgage Market Review (MMR) which meant lenders had to now also include measures of affordability in their calculations before lending on these interest-only plans.
Therefore, lifetime interest only mortgage lenders; mainly Stonehaven equity release & More2life accordingly changed their lending criteria. Still using age & property value as factors, they will use a loan-to-value ratio to determine the maximum release of equity possible. Next, to justify MMR, these lenders now assess affordability of this calculation by checking income against expenditures, thus getting a feel of net disposable income & hence affordability.
Once approved, the implementation of the lifetime mortgage interest only plan can be completed. The loan amount will be released to the homeowner by a release of equity in the form of a tax-free lump sum. This can be spent in whatever manner they wish. From here, the homeowner will then make monthly payments of a pre-agreed nature & can be anywhere from a minimum amount of £25pm upto the whole amount of interest charged.
This monthly repayment made will determine the future balance. If the whole interest-only amount is repaid monthly, then the lifetime mortgage balance will remain level as long as payments are continued. If not, the balance will increase over time, albeit slower than if a roll-up equity release mortgage was selected.
In summary, lifetime interest only mortgages are designed for over 55’s looking to preserve their inheritance, or alternatively wishing to maintain the maximum amount of equity in their property for potential future borrowing.
How Much Can I Borrow?
In principle, the maximum interest only lifetime mortgage loan is based on the age of the youngest property owner & the value of the property. However, we would only advise to take the amount you are likely to spend over the short term. With the range of lifetime interest only plans available from Stonehaven & More2Life’s Interest Choice, the younger the age, the less you can borrow. Conversely, the older you are the higher the loan-to-value amount both lenders would consider.
As an example with the Stonehaven Interest Select, a 60 year old male with a property valued at £250,000 could potentially release a maximum of £60,000 with a monthly interest rate of 6.78% fixed for life. He could then choose to make repayments anywhere from £25pm upto the maximum £338.95pm, dependent upon affordability.
Case Study – Lifetime Mortgages Interest Only In Action
Percy, aged 80 owns his own property which is unencumbered & valued at £200,000. He has a daughter – Jane who is looking to build an extension on her own property for dog grooming purposes. Jane has approached her bank but was declined on affordability grounds as she is self-employed & unfortunately cannot prove income.
Percy therefore made enquiries into the Stonehaven Interest Select range, as he has affordability & additionally his daughter has stated she would even refund him the payments made. Based on borrowing £55,000, Percy was able to qualify for Stonehaven’s Interest Select Lite Plan which has the lowest interest rate of 5.94% monthly (6.35% equivalent APR) and fixed for life.
Due to his combined retirement income of £29,000, Stonehaven accepted his application and he choose to contribute £200pm out of the maximum £272pm he could pay to clear the whole interest charged. He realised there would be a small element of roll-up, but Percy felt that it was an investment worth making & would also add value to his daughters property. He feels it’s an early inheritance that has helped Jane to start & now run a successful dog grooming business.
Making the decision as to which mortgage in retirement to choose can be a daunting prospect without the right equity release advice. Therefore, to put your mind at ease we can help you find a qualified interest only lifetime mortgage specialist who can discuss your requirements.
Please call the team today for a free no obligation initial conversation to see if you qualify. Our FREEPHONE number is 0800 689 0925 or alternatively feel free to complete our online enquiry form.
These are lifetime mortgage schemes. To understand the features & risks always ask for a personalised illustration. The pensioner mortgages information provided on this website is for the benefit of UK residents only.