The title ‘Lifetime Mortgage’ is now recognised as an equity release term given to loans where the interest is allowed to ‘roll-up’ onto the debt, increasing the amount outstanding.
However a variation of this is where the interest is charged but instead of rolling up, some or all of the monthly interest is paid each month by the borrower. In this way the debt either does not increase at all, or if part of the interest is paid the debt rolls up more slowly. Unusually, the loan can continue in this way until either the borrower leaves the property, possibly to enter residential or nursing care, or they die. The property would then be sold and the debt repaid.
In order to comply with the requirements of the Equity Release Council’s SHIP (Safe Home Income Plans) rules, these schemes also have to offer a switch to a ‘roll-up’ of interest if the borrower requests it, although this is done automatically if the borrower misses a number of monthly interest payments.
A common use for this type of scheme is where two borrowers commence a scheme together but then one of them dies and some or all of their income dies with them. The surviving partner, faced with a reduced income, may choose to then allow the interest to roll-up from that point onwards. In this way the extent of roll up has been deferred whilst both applicants are still alive.
In the general (non equity release) market interest-only mortgages are now extremely difficult to find following changes introduced by the Mortgage Market Review in 2014. Any such loans that are arranged will have a set term by which the debt must be repaid. However in this case of an equity release interest-only Lifetime Mortgage a nominal term is applied to the loan. Usually the term will be based on the statistical estimate of the applicant’s life expectancy. However, if it is reached and the borrower is still resident in the property then the mortgage simply continues – so never will there be a threat of repossession or being kicked out of your own home just because a term has ended.
Where are Lifetime Interest-Only Mortgages being used?
Andy Wilson is seeing a growing number of approaches for a lifetime interest only loan from retirement clients who previously had an interest only mortgage with a mainstream lender that is now coming to the end of its term, where they do not have a repayment vehicle in place to pay off the outstanding mortgage. Often this is because a previous vehicle such as an endowment policy has been cancelled and surrendered and the proceeds spent. In other cases the borrowers had planned to ‘trade down’ at merriment, but having reached this they now do not wish to move to a lower value property at all.
In some cases the option of continuing to meet the interest payments without fear of losing their home, being repossessed or having a fixed term to repay the mortgage is attractive. Add to this the future option to stop paying the payments when they can no longer afford them, and we have retired clients who are able to live in their own home, for life, with financial security and peace of mind.
In other cases Andy has seen family members contributing towards the interest payments, in the knowledge that they are helping to preserve what could be their inheritances!
Other ‘Interest-Only’ mortgages
Although lending criteria is very strict, it may be possible for some borrowers to obtain an interest-only mortgage with mainstream High Street lenders, but these should not be confused with true equity release lifetime mortgages. Firstly, these other schemes will have an end date on them, meaning the loan has to be repaid by the end of the term. Failure to do so could result in repossession. Additionally, failure to meet the monthly interest payments could also result in repossession. You may also be subject to interest rate variations in the future whereas many Lifetime Mortgages are arranged on lifetime fixed rates. Imagine also the effect of one partner dying, which could result in the loan becoming unaffordable.
Although some mortgage lenders may allow mortgages to run slightly into retirement, most lenders require the mortgage to be paid off in full by the age of 75. The maximum loan available is also restricted by the retirement income (pensions etc) which is usually much lower than when the applicants were working. One of the previous leading providers of such schemes, Halifax PLC, withdrew its popular ‘Retirement Home Plan’ product in August 2011.
If you would like to learn more about your options for an interest-only lifetime mortgage, please use the ‘Contact Andy’ form at the bottom of this page.