A voluntary repayment mortgage is perhaps one of the most flexible options when it comes to equity release products. This plan can be a great option for you if you are looking for a way to safeguard an inheritance for you loved ones by controlling the overall balance of your loan.
With this kind of plan, you can make ad-hoc payments against your loan and those payments can be of interest and/or capital. With most lenders, this plan allows you to pay up to 15% of the original amount you borrowed every year without having to pay any early repayment charges or fees.
Functionality of a Voluntary Repayment Plan
Similar to other lifetime mortgage products, you must be at least age 55 years old to qualify for this type of plan and your home must have a minimum valuation of £70,000.
To start, you choose if you want to take a lump sum payment or a drawdown plan and receive your tax-free payment from the lender. Interest then just accrues according to the terms of your loan. The difference with this type of plan and other lifetime mortgages is that instead of the interest accruing and compounding, you make payments against your loan balance. You can repay some, if not all, of the interest your loan is accruing. You can even include payments against the loan capital.
There are different strategies you can employ with this type of plan. How you choose to repay the loan will determine the overall amount that needs to be repaid when your home is finally sold. You can choose to repay only interest, make the maximum payments allowed, or make totally random payments when you are able or want to do so.
If you manage to pay all of the interest on your loan as it is accruing, you will essentially keep your loan balance level with the amount you originally borrowed. This means that you’ll likely be able to protect an inheritance for your loved ones. When the home is sold, the original amount borrowed will be repaid to the lender and the remaining proceeds will be returned to your estate.
This strategy means that you will pay off the maximum amount allowed with your plan. Your payments would not just cover the interest accruing but would also go against the capital loan amount. If you are able to pay the full 15% that is usually allowed by lenders, you could essentially pay off your full loan in a matter of just 8 to 9 years.
This strategy could be employed if you want to occasionally make payments but do not want to stick to a specific schedule or amount. You would essentially make payments when you had some extra money. This would not keep the loan at a level equal to the original amount you borrowed but ultimately the balance would still be less than if you made no payments at all. Overall, you would need to repay less when your home was sold than if you chose to make no repayments.
There are many advantages to a voluntary repayment plan. To start, you do not need to prove affordability for the payments. So, you do not need to show any proof of your income in order to quality.
Secondly, as the homeowner, you are able to determine the strategy you want to employ when making your repayments. In addition, you won’t incur any penalties or fees for making those payments. Making payments is also very easy and straightforward. You can transfer your payment amount by debit card, cheque, or online transfer. Some lenders even allow for payments to be made through a standing order.
A voluntary repayment plan is a great option if you want to leave behind an inheritance to loved ones or if you are just generally concerned about the impact of interest-roll up with your loan. You get the cash you need and are still given the autonomy to control some of your loan balance. If this plan sounds like a good option for you, or if you’d like to further review how it works or its potential benefits, reach out to us to today for free specialized advice.