Interest Only Lifetime Mortgages are only slightly different than mainstream interest only mortgages in the residential mortgage marketplace. The premise behind interest only mortgages is the consumer repays only the interest compounding on the loan and not anything off the principle balance. Where standard and lifetime mortgages diverge is in the repayment of the principle amount and the duration of the mortgage term.
Standard interest only mortgages usually have a 10 to 15 year interest only repayment period. It means that at the end of the term there is a balloon payment to pay off the full borrowed which would usually have come from some form of investment vehicle such as an ISA or endowment policy. Interest only lifetime mortgages require the principle balance to be repaid at death or moving into long term care. As long as the main residence remains the same the loan is due at death.
How a Lifetime Mortgage Interest Only Scheme Works
Interest only lifetime mortgage companies will examine certain qualifications to determine the loan to value (LTV) percentage they award for the equity release. Age determines life expectancy of the person, where health can also have a mitigating factor. Poor health may reduce longevity; therefore, the loan is repaid earlier than a healthier adult.
Property value determines the amount of equity available in full. A home worth £400,000 has more equity than one valued at £200,000. The more a home is worth the more funds are available for interest only lifetime mortgages. However, should an existing mortgage be charged upon the property still, then this must be repaid at the same time as the new interest only lifetime mortgage is set up. There cannot be a mortgage & an equity release scheme running concurrently on a residential property.
The income a retiree has is now a factor for interest only products since MMR was introduced in April 2014. The lifetime mortgage company will check to ensure the borrower has enough monthly income to cover the interest payment required. Interest is based on an annual percentage rate broken into monthly payments, which are also determined by the total loan amount.
The principle balance remains the same throughout the life of the homeowner because the person is paying of interest each month. This is as long as monthly payments are maintained. However, lenders such as Stonehaven & More2Life offer an escape route should the homeowner fall behind on their monthly repayments.
These two companies will allow an interest only lifetime mortgage to be rolled over from interest paying to ceasing monthly repayments altogether. This can happen when the homeowner no longer has funds to repay interest, or just wishes to cease payments so they can enjoy those funds for their retirement there on in. If a rollover occurs and the borrower no longer makes these interest only payments then the principle balance will start to increase with compounded interest.
A no-negative equity clause is required by the Financial Conduct Authority and Equity Release Council Code of Conduct to ensure lifetime mortgage companies do not set up a plan that exceeds the current property value. These are also included as part of the lifetime mortgage interest only plans.
Property owners can request an inheritance guarantee to protect a certain percentage of the home. This percentage goes to beneficiaries when the home is sold to repay the loan.
Features of Interest Only Equity Release
• Interest payments are required to maintain a level balance
• Fixed interest payments for life mean a known monthly payment for life
• Tax free lump sum on completion of the loan
• Principle balance remains the same for the life of the loan
• Final payment due at death or they move to long term care facility
• No-negative equity guarantee provides security for beneficiaries
• Can add inheritance clause to assure a set amount of the property is retained
Lifetime Interest Only Mortgage Qualifications Required
For homeowners to take out an interest only equity release the youngest homeowner needs to be 55. If jointly owned, the minimum age still applies. Some companies may require the person to be at least 60 years of age. There is a maximum age with many companies of 75. It is generally accepted someone age 75 can still make monthly payments, while someone older may not have enough income from other sources like retirement accounts to make monthly interest payments.
The home value must be at least £70,000 and be situated in England, mainland Scotland Wales & one lender will consider properties situated in Northern Ireland. This form of mortgage in retirement answers a common question which is ‘Can a pensioner get a mortgage in retirement?’ – the answer is a resounding yes & it is the equity release market that is providing these solutions.