Interest-Only Lifetime Mortgages Explained
Lifetime mortgages can be an attractive option for retired applicants looking to make the most of their property equity. Read on to uncover how an interest-only lifetime mortgage works and all the pros and cons you should know before you apply.
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Based on your yearly income,
you may be able to borrow
Most lenders will let you borrow 4.5 times your annual salary so, as long as you have a standard 10% deposit, you should be able to borrow this much.
Depending on your personal circumstances, some lenders may let you borrow 5 times your salary.
Lenders usually cap the amount they lend at 5.5 times your salary, so it’s unlikely you’ll be able to borrow more than this.
Interest-Only Lifetime Mortgages Explained
Later life mortgages are a growing lending sector, as the UK population lives longer, and looks for more flexibility in mortgage lending past retirement.
One interest-only borrowing option is a lifetime mortgage, usually available to applicants aged 55 or above.
For more information about later life mortgages or interest-only lending, and all the considerations to bear in mind, contact Revolution on 0330 304 3040 or email us at [email protected].
How Do Lifetime Mortgages Work?
This mortgage releases equity from your property, with interest paid each month. There is no capital repayment element, and the original loan value is recouped when you pass away or move into care, at which point the lender sells the property.
Any excess sale proceeds remaining are passed to your beneficiaries.
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What Factors Impact my Eligibility for a Lifetime Mortgage?
Lenders will consider multiple factors before offering an interest-only lifetime mortgage, such as:
- Your age, with the minimum being 55.
- Your income, from pensions, savings or work.
- Your property, and whether it is standard bricks and mortar or more unusual construction.
- The location of your property.
- Your health.
- The value of your property.
- Your credit history.
The most crucial part of applying for an interest-only lifetime mortgage is to ensure you only apply to lenders who are likely to be able to accept you and offer competitive rates - which is best explored by using an independent broker.
What Interest Rates are Charged on Interest-Only Lifetime Loans?
Interest rates are fixed against the full loan value since this is not repaid until the end of the term.
As a borrower, you can choose to pay back some of the capital depending on the mortgage terms, and whether your provider charges exit penalties for additional payments.
It is essential to understand the costs, as rolled-up interest will be deducted from the property sale proceeds and can have a significant impact on your inheritance planning.
What is an Interest-Only Lifetime Tracker Mortgage?
This product works just like any other lifetime mortgage but uses an interest rate based on the Bank of England base rate.
Most lifetime mortgages used a fixed rate, but this option means that your payments could increase or decrease as interest rates move.
What is the Maximum I Can Borrow on a Lifetime Mortgage?
Generally, lenders offer up to 40% or 50% of the value of your property. Higher Loan to Value ratios are available depending on the property and your eligibility.
Lenders will also consider the below factors in deciding the maximum they can lend:
- Your age - lenders will set a higher LTV cap the older the applicant, in most cases.
- Your health - if you have any severe health issues, the LTV ratio might be higher.
- Your income - most lifetime mortgage lenders will offer up to 4.5 times your annual income, with some going up to a multiple of five in the right circumstances.
- Your property - the house will need to be valued, and the higher your equity, the better a Loan to Value ratio you will be offered.
Are Interest-Only Lifetime Mortgage Calculators Useful?
They can be - a calculator is a fast and free way to get an idea about how much you could borrow, or how much it would cost.
However, you should be mindful that these calculators offer generic figures, without considering your circumstances, so cannot indicate whether you'd be likely to be approved.
For example, a calculator doesn’t check your credit rating or assess whether your property is of standard construction, so should only ever be relied on for indicative values.
The only sure-fire way to receive an accurate quote is to contact an experienced later life mortgage broker.
Can Interest-Only Retirement Mortgages be Paid Back?
Lifetime mortgages aren’t intended for repayment - the lender secures the property and sells this when you pass away or go into care.
However, some lenders might offer the option to repay the debt and therefore retain ownership of the property for your beneficiaries. It is worth seeking independent advice if this is a potential option, as some providers charge steep penalties for early repayments.
Exemptions from early repayment charges can apply if:
- You have a joint lifetime mortgage, or as a single applicant, pass away or go into care, and the estate has the capital to repay the debt.
- A surviving spouse in a joint homeowner lifetime mortgage pays back the balance within three years of a partner passing away or moving into care.
- You reach an age cap as identified in your mortgage terms - typically around 88 years old.
Lenders may also offer other scenarios where early repayment penalties are waived. This is often a percentage of the capital - so you can pay back as much as you like, but if it is within the first five years, a penalty of 5% will be levied, and a further 3% for repayments in the five years after that.
Some providers implement fixed-rate penalties, but then after an initial period, may link charges to the interest rates.
Are There Advantages to Choosing a Lifetime Mortgage on an Interest-Only basis?
- You can use the lump sum however you wish.
- There are no capital repayments throughout your lifetime.
- You remain in your home and retain ownership until you pass away or move into care.
- The capital can supplement your pension income.
- Lifetime mortgages never expire, so you will not need to renew or reapply.
- You can make early repayments depending on the terms of the mortgage.
- There is usually the option to transfer the mortgage to another provider.
Lifetime mortgages are also attractive when you have an adverse credit history or a low income since the criteria rely mostly on the property value, and how much equity you own.
What are the Pitfalls to Choosing an Interest-Only Lifetime Mortgage?
As with any loan, it is vital to understand the downsides as well as the benefits:
- By releasing equity from your property, you reduce your inheritance left to your will recipients.
- Income increases might impact means-tested benefits.
- The balance owed will increase if you do not keep up with the interest payments.
- Missed payments are rolled up into the balance owed, which can spiral.
- If your income changes, it can impact your ability to keep up with the interest payments.
- In some cases, there is a risk of repossession if you fall behind.
- Early repayment charges can be costly.
With such a range of pros and cons, we strongly recommend seeking independent advice before proceeding with a lifetime mortgage application.
Are There Other Equity Release Products Rather than a Lifetime Mortgage?
There certainly are - and the right lending option for you depends on your requirements and circumstances.
- Home Reversion Plans mean selling a proportion, or all of your property, with the right to remain in residence until you pass away or move into care.
- Hybrid Equity Release Loans allow you to combine interest-only retirement mortgages with equity release. This means being able to pay the interest each month but choosing if you want to reduce the payment or stop the payments. In this case, the interest is added to the loan balance. The capital is recouped, along with interest accrued, on the sale of the property at the end of the term.
For help analysing these alternative products, and identifying which is most cost-effective for you, contact Revolution Brokers on 0330 304 3040.
Why Expert Support is Essential When Considering an Interest-Only Lifetime Mortgage
Retirement and lifetime mortgages are just some examples of the multiple later life borrowing options, and each has an array of positives and negatives that it is critical to understand.
Revolution Brokers is an independent whole of market broker, which means we recommend only products that we think are the optimal option for you.
Contact us today on 0330 304 3040, or email at [email protected], and we will schedule a convenient time for a chat with one of our later life mortgage experts.
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The content included in our articles, blogs, web pages and news publications is based on information accurate at the time of writing. Note that policies and criteria can change regularly throughout the UK mortgage lending market, and it remains essential to contact the consultation team to receive up to date guidance. The information included on the Revolution Brokers site is not bespoke to any circumstances or individual application scenarios and therefore is not intended to be used as financial advice. The content we share is designed to be informative and helpful but cannot be relied upon to provide individual advice relevant to your mortgage requirements. All Revolution team members are fully qualified, trained and experienced to provide mortgage advice of an independent nature.
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