How do interest only lifetime mortgages differ from normal lifetime mortgages?
To understand interest only lifetime mortgages we firstly need to understand general lifetime mortgages.
A lifetime mortgage is an equity release plan where borrowers make no payments of interest or capital on the loan. As a result the debt will grow over time. The loan can continue in this way until either the borrower dies, enters long term care or they move home. The property would then be sold and the debt repaid.
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. If only a part of the interest is paid (which is allowed), the debt rolls up, but more slowly.
To comply with the requirements of the Equity Release Council’s SHIP (Safe Home Income Plans) rules, these interest only schemes also have to offer a switch to a ‘roll-up’ of interest if the borrower requests it. This is done automatically if the borrower misses a number of monthly interest payments, and cannot be reversed.
An equity release interest only lifetime mortgage has no fixed end date. A nominal term is quoted in paperwork but only to allow the calculation of an ‘annual percentage rate’ for the loan. However, if it is reached and the borrower is still resident in the property then the mortgage simply continues. This means there is never a threat of repossession or being evicted from your own home.
Where are Interest Only Lifetime Mortgages being used?
In the general mortgage market, interest only mortgages are now extremely difficult to find. This followed changes introduced by the Mortgage Market Review in 2014. There are many interest only mortgages coming to the end of their term with no means of them being paid off, and this is causing hardship for some.
Andy Wilson is seeing a growing number of approaches for lifetime interest only mortgages loan from clients who have such normal interest only mortgages with a mainstream lender. Their terms are ending and they do not have the means to pay off the outstanding mortgage. It is estimated that 40,000 interest only mortgages a year will mature up to 2034, with many in this situation.
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 may have planned to ‘trade down’ at retirement, but now do not wish to move to a lower value property at all. Many wish to stay in their current home throughout their retirement.
An attractive option is continuing to meet some or all of the interest payments without fear of losing the home, being repossessed or having a fixed mortgage end date. Added to this, the option to stop paying the payments when they can no longer afford them is very reassuring. Andy can help retired clients remain in their own home, for life, with financial security and peace of mind.
Deferring the start of rolled-up interest
Another common situation is where two borrowers commence a scheme together and have sufficient income to make the interest payments. However, when one of them dies it is likely some or all of their income will die with them. The surviving partner, faced with a reduced income, may choose to then allow the interest to roll-up. In this way the extent of roll-up has been deferred whilst both applicants are still alive.
In other cases Andy has seen family members contributing towards the interest payments. They are then helping to preserve what could be their future inheritances!
Can I get a normal interest only mortgage?
The general mortgage market has very few options for only paying interest on loans. The industry Regulator made it difficult for lenders to allow such loans, although a small number do. However, lending criteria is tight around how the loan can eventually be paid off.
Most lenders require mortgages 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. This was, in essence, a ‘RIO’ type mortgage.
Retirement Interest-Only (RIO) mortgages
A recent development has been the relaxation of lending criteria for older borrowers wanting an interest only loan for life. These are not equity release plans, but ‘ordinary’ mortgages with certain features. The significant feature is that these loans can run for the life of the borrowers, unlike conventional mortgages.
Proof that long term pension income is enough to support the payments is needed, which can be a significant drawback. This applies to each borrower individually, in case one partner dies, along with their income. to date, this has been the biggest stumbling block for those looking at RIO mortgages.
However, care should be taken not to confuse RIO mortgages with true equity release interest only lifetime mortgages which carry ‘SHIP’ guarantees.
Firstly, payments to RIO mortgages must be paid on time and failure to do so could result in repossession. These mortgage may also be subject to interest rate variations or rises in the future, increasing your costs. Imagine also the effect of one partner dying, which could result in the loan becoming unaffordable.
If you would like to learn more about your options for interest only lifetime mortgages, please use the ‘Contact Andy’ form at the bottom of this page.
EQUITY RELEASE MAY REQUIRE A LIFETIME MORTGAGE OR HOME REVERSION PLAN. TO UNDERSTAND THE FEATURES AND RISKS, ASK FOR A PERSONALISED ILLUSTRATION.