What is an interest-only lifetime mortgage? | moneyfacts.co.uk

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Published: 23/12/2020

At a glance

  • A lifetime mortgage is a type of equity release
  • An interest-only lifetime mortgage allows borrowers to pay back all or some of the interest
  • Paying back interest reduces the total amount owed

A lifetime mortgage is a type of equity release where homeowners aged 55 and over can release equity in their home into cash. Borrowers using a lifetime mortgage secure the debt against their property and this is traditionally only repaid when the borrower goes into long term care or when they pass away.

Traditional lifetime mortgages allow the borrower to access to a lump sum without the need to make any monthly repayments and this can be advantageous for those managing tight monthly budgets. However, a big downside is that the amount owed will increase significantly because interest is added each month and never paid back. Each month the interest is calculated based on the amount borrowed plus any interest already added. This means the total amount of interest applied increases every month. When left for many years, this can sharply increase the amount owed.

An interest-only lifetime mortgage allows the borrower to pay some or all the monthly interest being charged. This reduces the overall amount owed. Managing the amount borrowed with interest may be important to those borrowers wanting to protect how much of their property’s value is left to their beneficiaries.

How is interest calculated on a lifetime mortgage?

Most lifetime mortgages offer a fixed rate of interest for the life of the mortgage. This means the interest rate will not change no matter what happens to the Bank of England base rate or any reference rates of the equity release lender. When borrowers make a monthly payment, this reduces the amount of interest being added to the mortgage each year.

Find out more about how equity release advice works.

How to use equity release and protect the value of your estate

All lifetime mortgages from lenders that are members of the Equity Release Council include a ‘no negative equity guarantee’. This means borrowers will never owe more than their property is worth. There are also some lifetime mortgages that offer an ‘inheritance guarantee’, this protects a minimum percentage of the value of the borrower’s home to leave to their beneficiaries.
An interest-only lifetime mortgage can also help to manage the total debt owed as the borrower pays back all or some of the interest each month.

Remortgage a lifetime mortgage to a lower rate could save borrowers thousands

Interest rates on lifetime mortgages have reduced over the past decade. Depending on their individual circumstances borrowers could save significant sums by switching to a lower rate lifetime mortgage. Speak to our preferred equity release broker and find out if you could remortgage your equity release and reduce the cost of your interest.

How much cash could borrowers release using equity release?

Borrowers can use an equity release calculator from Hub Financial Solutions to see how much they could release from their home. Borrowers need to be a homeowner of a property in England, Scotland or Wales, aged 55 and over and be resident in the UK. Lenders will also have criteria for the value and types of properties they are happy to lend against for a lifetime mortgage.

An equity release adviser will explain how interest works and help you to determine how much you could afford to pay.

Read more about the different types of lifetime mortgage.


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Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

At a glance

  • A lifetime mortgage is a type of equity release
  • An interest-only lifetime mortgage allows borrowers to pay back all or some of the interest
  • Paying back interest reduces the total amount owed


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