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What is an interest-only lifetime mortgage?

Simon Stanney

Last reviewed 11th December 2023 by Scott Robertson

6 min read

An interest-only lifetime mortgage is a kind of equity release plan where you can pay the interest off on a monthly basis, so the size of your loan never goes up.

How does an interest-only lifetime mortgage work?

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 other lifetime mortgages, with an interest-only plan, you pay off the interest on the equity release loan monthly – rather than paying it off with the loan through the sale of your home when you pass away or permanently move into care. This means the balance you owe for the loan itself never rises.

An interest-only lifetime mortgage reduces the debt owed compared to a standard lifetime mortgage, which is subject to compound interest. (This is when you pay interest on the original loan amount, and also on the interest that’s already been added – meaning the amount you owe can grow quickly.)

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What makes an interest-only mortgage unique?

An interest-only lifetime mortgage differs from other types of mortgage plan in five ways:

  1. Only the interest needs to be repaid on an ongoing basis – so the amount you owe never goes up or down. Your initial mortgage amount will still need to be paid when your plan ends (either when you die or permanently move into long-term care) from the sale of your property
  2. There's no upper age limit – you just need to be over 55
  3. Interest can be fixed for life – helping you plan your retirement finances
  4. There's no end date – the loan gets repaid after you pass away or go into permanent care
  5. You can stop paying any time – you'll still stay in your home, but the ongoing interest will be added to your loan from that point, effectively becoming a roll-up lifetime mortgage

An equity release interest-only lifetime mortgage can help to protect your family's future inheritance. This is 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.

Interest-only lifetime mortgage rates

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 than, say, a standard repayment mortgage.

That means you'll ultimately end up paying more interest over time without increasing your remaining 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 and any interest not already paid off, would need to be paid off when you pass away or permanently move into care.

When this time comes, your family would benefit from an increase in your house price. However, they'd need to repay what you owe to the interest-only lifetime mortgage provider first. Then after any other debts have been settled the remainder can be inherited.

Advantages of an interest-only lifetime mortgage

  • 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 in excess of the loan amount
  • The cash you unlock is tax free – and is yours to spend on whatever you like after paying off any existing mortgage and/or secured loan
  • You can stop paying any time – with the flexibility to switch to a 'roll-up' lifetime mortgage
  • If you're over 55, you qualify – as long as your home qualifies too and you pass the affordability assessment
  • You don't need to pay back the loan capital – it gets paid when you pass away or go into permanent care
  • It's not based on income, just your age and property value – making it attractive to retirees
  • You can take your mortgage with you if you move – as long as the new home meets your lender's criteria

Disadvantages of an interest-only lifetime mortgage

  • Equity release affects inheritance – reducing what you can leave to loved ones
  • Eligibility for your current and any future means-tested benefits could be affected – always get financial advice before you go ahead
  • Interest repayments could add to your overall monthly outgoings – 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 other mortgage rates
  • Your home must be mortgage-free – or you have to be able to 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.

  1. Retirement interest-only (RIO) mortgage

    An RIO mortgage( opens in a new tab) is very similar to an interest-only equity release mortgage. You pay the interest each month until you die or move into long-term care, and then the initial mortgage amount is repaid from the sale of your home.

    However, RIOs are based on affordability into retirement and are stress-tested( opens in a new tab) on the first death in a couple, based on the spouse with higher income dying first. So they're not an option for many people.

    RIOs are also less flexible than interest-only lifetime mortgages, as they generally offer one lump sum rather than flexible repayments. Whereas with a lifetime mortgage you can make interest-only payments, but you can also choose to stop making the payments and let the interest roll up.

  2. Roll-up lifetime mortgage

    No monthly payments. The loan and interest is paid by the sale of your home when you pass away or move into permanent care.

  3. 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 until you need it.

  4. Flexible lifetime mortgage

    You can choose to make voluntary payments to bring down your mortgage loan amount.

  5. Enhanced lifetime mortgage

    Only for those with life-limiting medical conditions, these let you unlock more cash from your home, and may qualify for better rates.

  6. Home reversion

    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.

  7. Downsizing

    Equity release isn’t right for everyone. Another option could be to downsize. Read our guide Equity release, downsizing and other options for more information.

  8. Savings and investments

    If you have savings or other investments, you could use these to help finance your life in retirement.

  9. Keep working or switch to part-time

    If haven’t retired yet, you could keep working for a little longer. If you only need a small amount of extra cash, you could even go part time.

  10. Sell existing assets

    Selling more valuable items that you don’t need any more (such as a car) could be another way to get extra cash.

Read our Considering alternatives to equity release guide for more information.

Next steps

Learn more about equity release with SunLife to find the right option for you, or find out more in our free equity release guide.

Want to know more about equity release?

Visit our dedicated equity release hub

The thoughts and opinions expressed in the page are those of the authors, intended to be informative, and do not necessarily reflect the official policy or position of SunLife. See our Terms of Use for more info.