Interest Only Lifetime Mortgage
With five equity release plans in the market, and four of them are lifetime mortgages your retirement has options if you need tax free cash. There are many who have not saved up enough for their retirement which could result in selling the home they love, remaining in the workplace much longer than they wish, and other downsides. If you need extra funds, but worry about the roll-up nature of a lifetime mortgage, you may find answers in this interest only lifetime mortgage section.
Lifetime Interest only mortgage schemes are the only lifetime mortgage product that requires a monthly repayment. It is a monthly repayment of interest only rather than capital repayment plus interest. There is discipline involved like a conventional mortgage, however there is an opt out clause should repayments become unmanageable.
An In-depth Look at Lifetime Interest Only Mortgage Schemes
The main benefit of interest only lifetime mortgage schemes is to keep the capital sum the same from the day you sign the loan paperwork, till your death. As with any lifetime mortgage you repay the capital sum at death or upon moving into long term care. Any time the home is not your main residence anymore the loan is due to be repaid which is usually a 12 month window provided by the equity release lender.
Now generally there is one reason why homeowners do not want the interest to compound on the loan and it is their heirs. When interest adds onto the loan it means there is potential to lose any inheritance for these beneficiaries. By keeping the capital sum the same until the home is sold, there is potential to leave inheritance as the balance will remain level, but hopefully in the meantime the value of the home may have risen. The current market value minus the capital sum equals leftover equity for the heirs.
There is a minimum loan amount required which is usually set at £10,000; however, a few companies require more such as £15,000, so check with your equity release adviser beforehand.
Qualifying Parameters for Plans
Understanding how the loan can help you and your family is just the beginning as there are qualifications you must meet. Joint or single applicants will need to be at least 55 years of age as a minimum. In some instances companies require an age of 60 or up to 70 before they will consider a lifetime mortgage loan. For interest only lifetime mortgage schemes it is usually an age range of 55 to 75 where a person can take out this loan type.
The age concept is based on the ability to repay the monthly interest. Someone over 75 may not have the income to afford the loan at the outset, which is why some companies place a cap on the age. Due to the introduction of the new MMR (Mortgage Market Review) in April 2014, lenders are now more stringent on affordability criteria. Therefore, evidence of affordability both prior & following retirement needs to be exhibited for lifetime interest only plans.
Property value also makes a difference for the lump sum of tax free cash provided during the equity release. For interest only lifetime mortgages the minimum generally starts at £70,000 with Stonehaven. Property construction tends to be of a standard nature & locality to large council house estates would be measured along with a flood check.
The age determines life expectancy and thus the amount of time the loan will be outstanding. Since the loan is repaid at death or move to an assisted living facility, companies have to wait a while for the return on their investment.
A loan to value percentage is derived based on age and property value which may be as little as 11% of the home value at age 55, and upto a maximum loan to value of 45% at age 45.
Inheritance Protection and Incentives
Part of the incentives packages with this type of mortgage are in the repayment options. Flexible repayment options may allow for a minimum of £25 per month paid on the interest. It may not be the full interest that has accrued. Some companies allow homeowners to pay what you can afford. Others require the full interest payment. Any interest that is not paid goes on to the capital sum and compounds for the life of the loan. Obviously if you do not pay off the interest in full each month the capital sum increases, which can create an issue with the inheritance you want to leave behind.
Understand that the Financial Conduct Authority (FCA) has a no negative equity guarantee regulation, where your loan cannot exceed the home value. This protects you, but not the inheritance. There is a potential to protect it through the inheritance protection guarantee. This guarantee removes a percentage of the home from the calculation. It cannot be used and must be given to beneficiaries.
Another option within the interest only lifetime mortgage design is a rollover. Some lenders allow you to rollover your current interest only lifetime mortgage scheme into a roll-up mortgage, where you no longer have to pay interest each month. This is in the event your income dries up and you no longer have the ability to make payments, or you have simply decided you wish to retain the payments for future income now. With several flexible options on the market it is important to compare the aspects highlighted and speak with you equity release specialist.