Interest only lifetime mortgages are a form of equity release scheme that break with tradition. Anyone considering equity release schemes automatically assume the roll-up interest version, which require no repayments and an increasing balance which ultimately results in the reduction of the property equity. The interest only lifetime mortgage provides the opposing scenario to these roll-up lifetime mortgages.
An lifetime interest only mortgage is as the title suggests a mortgage which effectively lasts for the rest of one’s life. The interest only mortgagee aids release of a capital lump sum from the property, using a 1st legal charge as their security. From inception of the plan, the majority of lenders* then require monthly installments of interest from the applicant. This monthly direct debit payment effectively covers the interest being charged by the equity release company.
As a result these repayments of interest, the debt is managed accordingly, in so much as the balance will thereafter will perpetually be at the same level as it started (providing repayments are maintained). Many consider this as a form of equity release mortgage with inheritance protection, as by taking an interest only lifetime mortgage provides beneficiaries with the comfort of knowing exactly the final settlement figure to repay the lender.
The loan is eventually repaid when the last mortgagor has died or moved into long term care. At that point the house is usually put on the market by the executors of the estate (not the lender). The house is then eventually sold with the initial proceeds paying off the mortgage & the surplus balance passing into the estate for onward distribution to beneficiaries.
Before committing to any equity release mortgage, under Equity Release Council rules an individual seeking an equity release lifetime mortgage must obtain advice from a qualified adviser with relevant qualifications. The equity release advisers role will be to assess your current situation, understand your objectives and put forth recommendations which should always be based on a whole of market approach. This should ensure that ALL equity release loans have been considered, affordability levels are adequate for repayments and best advice is provided.
A common misconception is that mortgages in retirement have all but disappeared, particularly following the unfortunate withdrawal of the Halifax Retirement Home Plan back in 2011. The FCA (Financial Conduct Authority) have been through the process of reviewing the mortgage market and April 2014 has brought about the introduction of the Mortgage Market Review. This has introduced new standards of underwriting for interest only mortgage criteria, ultimately leading to more stringent decision making & in many cases the withdrawal of their later life mortgages.
However, for the traditional retirement mortgage is still available albeit in much smaller numbers & effectively becoming a niche lending product. We have seen the Leeds Building Society pull their retirement mortgage range which at one point could run until age 85 on a generous multiple of income. Alas this and others beside has disappeared. However, not only have these loans disappeared, but many that still remain will have their criteria tightening in the wake of the recent financial turmoil.
* for their interest only equity release schemes both Stonehaven Interest Select and more2life interest choice accept any repayment of interest between £25pm & the full interest charged. By not paying off the full interest will result in an increasing balance, albeit rising slower than a traditional equity release scheme, dependent upon the amount repaid.