Group Head of Equity Release Marketing and Distribution
Last updated 20th November 2020
7 min read
An interest only lifetime mortgage is a relatively new kind of equity release plan where you can pay the interest due on a monthly basis, so the size of your loan repayment never goes up. They’re an increasingly popular option for over-55s – but could an interest only lifetime mortgage be the right option for you?
How an interest only lifetime mortgage works
Like other types of lifetime mortgage, an interest only lifetime mortgage is a way to release equity from your home to spend as you wish – and you need to meet many of the same requirements, like being at least 55.
But unlike those other types, with an interest only lifetime mortgage, you pay off the interest on the equity release loan monthly – rather than paying it off along with the loan through the sale of your home when you pass away or move into care.
Because you’re only paying the interest, the balance you owe for the loan itself never changes.
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The key differences
Here are the main five ways an interest only lifetime mortgage is different from other types of mortgage plan.
- You only repay the interest – so the amount you owe never goes up or down
- There’s no upper age limit – you just need to be over 55
- Interest can be fixed for life – helping you plan your retirement finances
- There’s no end date – the loan gets repaid after you pass away or go into permanent care
- You can stop paying any time – you’ll still stay in your home, but the ongoing interest will be added to your debt from that point, effectively becoming a roll-up lifetime mortgage
More and more over-55s are turning to equity release interest only lifetime mortgage providers as a way to protect their family’s future inheritance: because you retain ownership of your home and your estate will still benefit from any increase in its value when it is sold.
Another benefit is that interest only lifetime mortgages don’t penalise older borrowers. If anything the opposite is true as the amount of equity you can release increases the older you are. Interest only lifetime mortgage providers base their calculation on the age of the youngest applicant and the market value of the property.
However, it’s worth remembering that while your monthly repayments will usually be a lot lower than some other mortgages, interest only lifetime mortgage interest rates are higher. That means you’ll ultimately end up paying more interest over time without increasing your share of the ownership of your home. Let’s take a quick look at why this is…
Let’s say you borrowed £200,000 through an interest only lifetime mortgage. However much the value of your home increases over time, that £200,000 loan plus the interest accrued would need to be paid off when you pass away or move into care. When this time comes, your family would benefit from an increase in your house price, however they’ll need repay what you owe to the interest only lifetime mortgage provider first, then what’s left will be their inheritance unless you have any other debts that need to be repaid. If you didn’t take out an interest only lifetime mortgage, they would benefit from the full sale value of your home.
Is an interest only lifetime mortgage right for you?
In the past, retirees often found it hard to borrow because of their age, but things are changing. There’s no age barrier when it comes to an equity release interest only lifetime mortgage – it allows you to borrow whether you’re as young as 55 or upwards of 90 years old.
With their sensible approach to lending and flexible features, interest only lifetime mortgage providers are proving an attractive option to many looking to release tax-free cash from their homes in later life.
An interest only lifetime mortgage could be particularly suited to you if:
- You’re comfortable with an existing, standard interest only mortgage (not the equity release ‘lifetime’ kind), but your current provider needs repaying
- You’d like to use equity release to help your family or just one of your children financially, but don’t want to jeopardise the future inheritance for the rest of the family
Our advantages and disadvantages of an interest only lifetime mortgage may also help you to consider whether it would be right for you. Many of these also apply to other types of lifetime mortgages, so you should explore these too.
- Interest is fixed – so your monthly payments never change and your debt never increases provided payments are maintained
- You keep ownership of your home – and benefit from any future increase in value
- The cash you unlock is tax free – and yours to spend on whatever you like
- You can stop paying any time – with the flexibility to switch to a ‘roll-up’ lifetime mortgage
- If you’re over 55, you qualify – if your home qualifies too, you’re good to go
- You don’t need to pay back the loan capital – it gets paid when you pass away or go into care
- It’s not based on income, just your age and property value – making it ideal for retirees
- Take your mortgage with you if you move – as long as the new home meets certain criteria
- Equity release affects inheritance – reducing what you can leave to loved ones
- Your means tested benefits could be affected – always get trusted financial advice before you go ahead
- Interest repayments add to your overall monthly spending – unlike other types of equity release plans where there’s nothing to pay monthly
- There are early-repayment charges – if you want to pay off the loan early
- Interest rates are usually higher – because they’re fixed for life, interest only lifetime mortgage interest rates are normally higher than some other mortgage rates
- You can’t get one unless your home is mortgage free – or if you can borrow enough to clear any existing mortgage or secured loan
- How much cash you can unlock is limited – it’s a percentage of your home’s value based on your age. If you want to access more of your equity, there are other mortgage options also suited to retirees
Alternatives to an interest only lifetime mortgage
An interest only lifetime mortgage could be a useful option for those wishing to release equity from their home in later life, but it’s not the only way.
Other types of lifetime mortgage
Unlock tax-free cash from your home by taking a loan against your home with a lifetime mortgage.
Roll-up lifetime mortgage
No monthly payments. The loan and any interest is paid by the sale of your home when you pass away or move into care.
Drawdown lifetime mortgage
A drawdown lifetime mortgage is like a roll-up lifetime mortgage, but you take the loan in instalments, leaving cash in an interest-free reserve account till you need it.
Flexible lifetime mortgage
You can choose to make voluntary payments to bring down your mortgage loan amount.
Enhanced lifetime mortgage
Only for those with medical conditions, these let you unlock more cash from your home, and may qualify for better rates.
With a home reversion plan, you can unlock tax-free cash from your home by selling a share (or all) of your property to your equity release provider.
Get the right advice
At SunLife, we’ve been working with people over 50 for more than 200 years – and we’ve learned to focus on what works best for our customers. When you talk to The SunLife Over 55 Equity Release Service about an interest only lifetime mortgage, rest assured we’ll put you in touch with an expert advisor before you make any big decisions.
The advisors we’ll put you in touch with are members of the Equity Release Council – a not-for-profit industry body for equity release. Like SunLife, they are also regulated by the Financial Conduct Authority (FCA), which has provided protection and peace of mind for equity release customers since 2004.
With any lifetime mortgage you take out through us, you can be reassured that you’ll get a ‘no negative equity guarantee’ meaning you’ll never owe more than the value of your home so will not pass any debt onto your family.
Be sure to talk things over with family and loved ones, too.