Blog > The benefits and drawbacks of an interest-only lifetime mortgage

The benefits and drawbacks of an interest-only lifetime mortgage

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By Clare Yates • 15th July 2023 • 5 min read

Things to consider with an interest-only plan

Interest-only plans could be ideal for equity release customers who may have concerns about their loan growing in size due to the compound interest.  

This blog explores the option of interest-only lifetime mortgages, including the benefits and drawbacks of this type of plan. 

Read on to understand more about:

  • How does equity release work?
  • What is an interest-only lifetime mortgage?
  • The benefits of interest-only lifetime mortgages.
  • The drawbacks of interest-only lifetime mortgages.
  • Are there other partial payment options with equity release?
  • How to explore equity release further.

For further information about equity release or to compare interest-only lifetime mortgages, call us on 0808 178 3055 or request a call back and we’ll connect you with an adviser. Alternatively, check your eligibility and get an initial indication of how much tax-free cash you could unlock.

How does equity release work?

If you are a homeowner aged 55+ in need of a boost to your finances, you may be able to use equity release to access some tax-free money from the value of your home.

A lifetime mortgage is the most popular type of equity release plan. It’s a form of loan that lets you continue to own 100% of your home. Exactly how much you can release will depend on factors including your age and property value. 

There are no mandatory monthly repayments with a standard lifetime mortgage. Instead, the loan plus interest is paid back through the sale of your home when you pass away or move into long-term care. However, you can make voluntary payments if you wish, with various options available which we will discuss further on.

Not yet 55? Read about how to release equity if you are under 55 here. 

To speak to one of our selected advisers for advice and to compare interest-only lifetime mortgages, call 0808 178 3055 or request a call back today.

What is an interest-only lifetime mortgage?

An equity release interest-only lifetime mortgage works in much the same way as a standard lifetime mortgage. However, with an interest-only plan, you can choose to make regular interest payments.

Interest-only lifetime mortgages typically allow you to pay off the interest in full each month. This will prevent your loan from growing in size over time. Or, you might choose to make partial interest payments to reduce the amount of interest that accrues on your loan.

When your plan comes to an end, usually when you pass away or move into long-term care, the money from the sale of your home will pay off the capital and any interest on your plan.

You can read more about interest-only lifetime mortgages.

The benefits of interest-only lifetime mortgages

The main benefit of an interest-only lifetime mortgage is that you can prevent your loan from ever growing in size if you keep up with the full interest payments. 

Even if you pay off just some of the interest each month, you will still reduce the rate at which interest rolls up your plan. This could save you thousands of pounds in interest that would otherwise accrue over the life of your plan.

  • The money you release is tax-free and can be spent on anything from holidays and home improvements to clearing your mortgage or helping your family financially.
  • You will continue to own 100% of your home and will benefit from any future increase to its value.
  • Paying off the interest in full every month will protect your estate from ever owing more than your original loan amount.
  • Most equity release plans offer an interest-rate that is set for the life of your plan.
  • You have the flexibility to stop making interest payments at any time. If you do, the plan switches to a standard lifetime mortgage and the interest is left to ‘roll up’ each month.
  • Some interest-only lifetime mortgages allow you to release more than you may be able to with a standard lifetime mortgage. 
  • You can build inheritance protection into many interest-only plans. This protects a set percentage of your property value for your family to inherit one day.

The drawbacks of interest-only lifetime mortgages

The main potential disadvantages of a lifetime interest-only mortgage compared to a standard plan are:

  • Equity release interest-only lifetime mortgages typically require you to pass an affordability check – that may not be necessary with other plans.
  • If you miss any payments, your interest-only lifetime mortgage will switch to a standard ‘roll up’ plan. This is subject to your lender’s terms and conditions.

Many of the other potential drawbacks of an interest-only lifetime mortgage are the same as a standard lifetime mortgage:

  • Your tax position and eligibility for some means-tested state benefits may be affected by the money you unlock from your home with a plan.
  • By its very nature, an equity release plan will reduce the value of your estate and the amount of inheritance you leave.
  • If you decide to pay off your equity release plan early then there may be an early repayment charge to pay.
  • Your home must be mortgage-free, or the amount left to pay must be small enough for you to clear it with the money you unlock with a plan. 

Are there other partial payment options with equity release?

If you choose an equity release plan from a member of the Equity Release Council, you’ll be able to make voluntary partial payments towards some or all of the loan capital. Providing you do not exceed your provider’s annual limit, the payments will be penalty-free.

Providers typically allow you to repay up to 10% of the loan penalty-free in a 12 month period. If you kept up with the maximum payments each year then you could eventually clear your loan without incurring any early repayment charges. 

So, if your provider allows you to pay up to 10% of your loan each year then you could effectively repay your loan, penalty-free, in just 10 years. Some providers even allow you to pay off 20% or even 40% each year. 

There are other Equity Release Council guarantees too which you will benefit from by choosing a plan from one of their members. This includes the ‘no-negative equity guarantee’, for example, which will be of reassurance to anyone put off by the equity release horror stories of the 1990s. 

How to explore equity release further

If you are thinking about arranging an interest only lifetime mortgage, UK homeowners can speak to our friendly selected advisers for guidance. As part of the service, they can compare providers to find the best interest-only lifetime mortgage plan for you. They’ll also help you understand all the pros and cons of a plan and search for competitive lifetime mortgage interest only rates.

For your peace of mind, all the initial advice you receive is given free of charge. You’ll only receive a fee for advice if you go ahead with a plan, though this can be paid from the money you unlock.

Our selected equity release specialists are ready and waiting to help you explore your equity options, all by telephone from the comfort of your own home. 

Please call 0808 178 3055, or request a call back for a time that suits you. Alternatively, check your eligibility and get an initial indication of how much tax-free cash you could unlock.

About Clare Yates. With over a decade’s experience writing about later life financial planning, Clare offers a wealth of knowledge about equity release, pension annuities, wills, LPAs and more. When she isn’t writing, Clare likes to spend her time baking and going on walks with her husband, two children and their rescue dog. Follow Clare on LinkedIn

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