Voluntary Repayment Schemes
Voluntary repayment equity release schemes were initially launched by Hodge Lifetime in 2013 & latterly by Aviva & are the first of a new breed of equity release plans which provide even greater flexibility over interest only lifetime mortgages. These two plans provide extra flexibility which will help keep improving the over 55’s lifetime mortgage marketplace. As a consequence of voluntary repayment plans being launched, we will hopefully evidence more retirees being assisted in their quest to improve their retirement lifestyles.
Where lifetime mortgages interest only schemes were designed to provide a disciplined way to control the balance of the equity release loan by keeping the balance level, voluntary repayment schemes take this one step further. Rather than having monthly payments which need to be maintained, voluntary schemes provide the facility to actually make repayments whenever the consumer requires and upto a maximum of 10% each year without ANY penalty.
What are voluntary repayment equity release schemes?
As their description suggests ‘Voluntary Repayment Schemes’ allow the partial repayment of the lifetime mortgage balance at any time after the inaugural year of the plan. This could be managed for a number of reasons. They are based on the fundamentals of the roll-up equity release plan where interest is added to the principle amount each year which results in an increasing balance, thus reduced inheritance.
However, rather than the loan increasing in size, the balance of voluntary repayment schemes can be controlled to suit the requirements of the planholder. Many will require the services of an equity release mortgage at some point in their lives, but dislike the compounding nature of roll-up interest & seeing their inheritance eroded. This can be particularly evident for retirees starting a release of equity at an early age of 55-60.
Therefore, two equity release providers have innovatively designed a roll-up lifetime mortgage plan where upto 10% of the original amount released can be repaid each year with no penalty applying. The choice of how much is repaid & when is purely down to the decision making of the equity release homeowner. Thus, the ultimate lifetime mortgage balance is entirely down to how they manage their repayment record.
How do these voluntary repayment lifetime mortgages work?
In essence, they are a roll-up lifetime mortgage with the flexibility to pay off upto 10% of the initial capital borrowed every year for the duration of the plan. This repayment attracts no admin fees or early repayment charges which has been the scourge of equity release schemes in the past. Now, voluntary repayment schemes are available, more control over the future balance can be influenced and the final inheritance for all beneficiaries is in the homeowners hands.
Following the first anniversary of the plan & upon receipt of the annual mortgage statement, the homeowner can elect to commence making payments. Dependent on which provider selected will also determine the nature of the voluntary repayments as there is the annual 10% option, or at random intervals during the year. The key here is random in order to avoid the issues surrounding the Mortgage Market Review (MMR) which Stonehaven & More2life have been burdened with.
Which companies offer equity release schemes allowing voluntary repayments?
The original equity release company that developed the lifetime mortgage repayment concept was Hodge Lifetime with its Flexible Repayment Plan in 2013. Along with its downsizing protection option, the Hodge Lifetime Plan grabbed a large slice of the market with it’s innovative approach, & rightly so. Realising the volume of baby boomers approaching retirement with interest only mortgages needing refinancing somehow, this plan along with its Retirement Mortgage offered a lifeline to many homeowners looking for a way out of avoiding the need to sell their house.
Offered on both a lump sum & drawdown basis, the Hodge Flexible Lifetime Mortgage plan would accept payments to either maintain a level balance by clearing the interest, or a first for the industry was the ability to REDUCE the balance of an equity release mortgage! Therefore, not enough to just keep a balance level, Hodge now allowed the balance to reduce down to a minimum cap of £10,000 without penalty. For those with good disposable incomes this product could be ideal under the right circumstances.
In 2014, with their market share reduced due to the popularity of the Hodge Lifetime Mortgage, Aviva went one step further by adapting their Aviva Flexi Lifetime Mortgage Plan to accept payments also. Adopting the same 10% rule, Aviva now also will accept repayments to control the future balance following 12 months of the plans inception. Aviva will actually allow FULL repayment of the scheme by the continual 10% repayment each year, which will inevitably end up with full redemption of the plan.
Case Study – Voluntary Repayments in Action
Derek is aged 65 and owns a semi detached bungalow worth £250,000 with his wife Cindy. They have a Santander interest-only mortgage for £45,000 which the lender has stated they have no intention of renewing in 3 months when the plan is due to expire. Due to previous financial issues they have no repayment plan in place & thought Santander would continue the plan indefinitely, with the sale of property on their death being their repayment strategy.
Unfortunately, due to lenders tightening their lending criteria on mortgages in retirement they will either have to downsize to a smaller property to clear the mortgage, or transfer the debt to a new lender whom accepts repayment of interest &/or capital. They obtained independent equity release advice and remortgaged from Santander onto the Aviva equity release plan at a 5.71% rate (5.8% equivalent APR) which was fixed for life.
In practical terms Derek & Cindy would set aside the equivalent interest only payments of £215pm into a cash ISA for the first 12 months & then upon receipt of their annual statement would contact Aviva & send them payment of £2,569, which represents the interest charged for the first year. By paying this back will reduce the balance back to the £45,000 originally borrowed.
This process they intend to maintain every year for the rest of their lives and will see their resultant balance remaining exactly the same. They now have the reassurance of knowing their children will only have a balance of £45,000 to pay back to Aviva following the last person dying or moving into long term care.
However, Derek & Cindy are also comfortable in the fact that if in any one year they don’t want to pay anything back, or pay more, or even pay less, they have the option of doing this as they are not contractually commitment to making ANY repayments to Aviva. For many the voluntary repayment option needs a degree of discipline, however for many it also provides the flexibility that equity release schemes have always lack in years gone by.
Voluntary repayment schemes require a greater degree of understanding and therefore advice must always be sought from an independent lifetime mortgage adviser. InterestOnlyLifetimeMortgage.com can provide a qualified adviser who specialises in these voluntary repayment schemes & can put together a repayment strategy tailored to your personal needs. This initial discussion, can be conducted over the telephone or in the comfort of your own home, from a UK equity release adviser.
Book your appointment today, or contact us on FREEPHONE 0800 689 0925 to discuss the merits of whether the voluntary repayment schemes from Aviva & Hodge Lifetime would meet your requirements. Alternatively, complete the online enquiry form to receive a call from one of our Interest Only Lifetime Mortgage specialists.
These are voluntary repayment lifetime mortgage schemes. To understand their features & risks, please ask for a personalised Key Facts Illustration. These pensioner mortgages included on this website are only for the benefit of UK residents.