Pros and Cons of Interest Only Lifetime Mortgages
September 25th, 2013Lifetime mortgages are a type of equity release scheme, where the mortgage can last until the end of life, or until the client moves into permanent care, or makes an earlier sale for any other reason. Interest only lifetime mortgages making the greatest in roads into the retirement mortgage market and currently offer some of the most flexible equity release options on the market.
Like any other financial product, interest only lifetime mortgages may not work for some people, but may be the perfect option for others. It’s important to understand the full terms and conditions of these equity release products and assess the potential impact on your life before making a final decision. Let us look at some of the main pros and cons of interest only lifetime mortgages in the market today.
Pros
Interest only lifetime mortgages are designed for older people, and fulfil the need for long term mortgages for over 55’s. The money can be released as a tax free lump sum and there are no constraints on what the money can be used for.
The main advantage of interest only lifetime mortgages is that you have the option of making full monthly interest payments. By making regular and full payments you can potentially maintain a level balance on the loan right until the end of the term and know exactly how much you will leave behind for your beneficiaries.
You have the option of choosing a fixed interest rate for life – this ensures that the interest rate remains constant until the end and does not increase even if the Bank of England rate or other mortgage lenders increase their own rates.
Unlike home reversion plans, interest only lifetime mortgages do not involve selling any portion of your property. You retain full ownership of the house and the lender recovers their money when the mortgage ends.
Interest only lifetime mortgages can be repaid at any time, with potentially no early repayment charges depending on the particular circumstances. It is also possible to switch to a roll up mortgage if you decide not to continue making interest repayments.
These mortgages are portable and can therefore be moved to another property providing it meets all of the lenders’ criteria.
Unlike a residential mortgage, an interest only lifetime mortgage does not have to rely on income or credit history to be eligible for these schemes. The value of the property and age are the two qualifying factors determining acceptability.
Cons
Missing monthly payments could mean that the mortgage is automatically switched to a roll up mortgage – which can be a concern for many people who wish to have control over the loan balance.
Monthly payments which become unaffordable in the future is also a common concern. Payments could become unaffordable if retirement income reduces for some reason – for instance if one partner passes away and the client no longer has enough money to meet the monthly payments.
Missing payments could also result in repossession with some forms of retirement mortgages. It is important to understand the full terms and conditions of the product. An independent financial adviser can help you understand all the potential consequences of the mortgage.
Releasing equity from your property has an impact on your income or savings. This could potentially affect any means tested benefits you may be receiving such as pension credit and/or council tax benefit. Again, it is important to understand the implications of releasing equity on means tested benefits.
There may be hefty early repayment charges to pay off the home equity loan earlier. This depends the provider and there may be charges for a certain period of time after which they could either reduce or be waived completely.
