Voluntary repayment lifetime mortgages offer a great solution to any homeowner who wants to take advantage of an equity release scheme but is also still concerned about the impact of interest-roll up on the overall loan balance. With this scheme, the homeowner can exercise a great deal of control over the interest accrual and overall loan balance.
With a voluntary repayment product, the homeowner can make voluntary payments against the loan, which can help to control the growing balance. With these plans, the general rule of thumb is that the homeowner can repay up to 15% of the of the original amount that was borrowed every year without incurring any early repayment charges. This allows the entire balance to be repaid in just a matter of a few years if the homeowner is so inclined.
How Does a Voluntary Repayment Plan Function?
In order to qualify for this type of scheme, the homeowner must be at least 55 years old and the property must have a minimum valuation of £70,000. Then the homeowner decides if they want to take their product as a drawdown mortgage or a lump sum one.
Interest accrues in accordance with the terms of the plan chosen. Of course, the interest is only ever charged on money that has already been received. So, for those who choose a drawdown plan, interest is only charged on the amount that has already been received and not the full amount in the cash reserve facility.
The homeowner is able to make repayments back to the lender so that interest is not able to compound in the same way it would if no payments were being made. The interest is either being partially or fully paid through the repayments being made. If the homeowner is able to make payments that are equivalent to more than the interest being charged, the actual balance of the loan will decrease.
There are many strategies that can be employed to help control the overall loan balance when using a voluntary repayment plan. The homeowner may choose to make payments of only interest, repay the maximum amount allowed, or make just random ad-hoc payments.
Interest-only payments: Using this strategy effectively keeps the balance level with the amount that was originally borrowed since all interest is being repaid through the repayments. This can help the homeowner to leave behind an inheritance to loved ones, given that the balance will only ever be the amount that was originally withdrawn.
Maximum repayments: This strategy is the best way to lower the overall loan balance. It means that the homeowner is not just making payments toward the interest that is accruing but also toward the capital. If the full 15% is repaid, which is the typical maximum amount allowed, the full balance can be repaid in as little as 8 or 9 years.
Random repayments: Making random repayments means that the homeowner just decides when to make a repayment and is not obligated to make them on any particular schedule. This strategy will not eliminate the interest being accrued or lessen the overall loan balance. However, it will certainly do more than making no repayments at all.
What makes a voluntary repayment plan so unique is that the repayment structure does not have to follow a specific schedule. In fact, the homeowner is really able to make decisions about their repayments as they see fit, giving them complete control and autonomy over their loan balance and how they choose to repay it.
There are many advantages to a voluntary repayment plan, the biggest of which is the sheer flexibility of the scheme itself. The homeowner can make repayments as they see fit and because of this, the homeowner has a lot of control they wouldn’t otherwise experience with a different scheme.
Secondly, there is no proof of income required to qualify for this particular scheme. The homeowner does not have to proof affordability because repayments are not required.
The homeowner has options to make payments against their balance. They can usually be made by cheque, through online bank transfer, a standing order or debit card.
Choosing the right scheme can be challenging, but we can offer specialized advice to help you determine the best scheme for your individual needs. Reach out to use today for a free consultation.