An Interest Only Equity Release Mortgage allows the borrower to make interest only payments on the mortgage debt. However there are two types of Interest Only Lifetime Mortgages now available on the market. One with voluntary interest only payments and the other with compulsory interest only payments.
Equity Release with Voluntary Interest Only Payments.
The first type is a traditional equity release mortgage with the option to make voluntary interest only payments.
The second type is a lifetime interest only mortgage which requires interest-only payments to be made
The important distinction between the two types is critical. In the first type of traditional equity release, the payments are entirely voluntary.As the payments are entirely voluntary, the borrower does not have to make these payments.
This means that the borrower can cease making interest-only payments at any time resulting in the interest starting to roll up.
It is important to understand however that this type of Equity Release Lifetime interest only mortgage is not based on affordability. Recently The Financial Conduct Authority relaxed the rules on Lifetime Equity Release Interest only Mortgages for those over a certain age( usually 55)
This means people who may have been put off in the past about Equity Release, due to possible erosion of Equity in their home as the debt rose each year, now have an new option. The option to make voluntary interest only payments each month, without having to proof income or affordability.
The borrower can usually decide at the outset how much they wish to voluntary pay in interest only payments. Most lenders offering this type of Mortgage will allow the borrower elect a payment covering the full amount borrowed.
So in effect as long as the borrower continues to make the full interest only payment, the outstanding debt will not rise.
For me this is a welcome innovation in the market, as it gives people more options when it comes to Equity Release, which can only be a good thing.
Interest Only Retirement Mortgage.
The second type of lifetime mortgage is also known as the Retirement Interest Only mortgage. This differs from the traditional equity release mortgage as it is based on affordability.
Most people will have heard of equity release.and most people will have preconceived ideas about this type of Mortgage
The most common assumption about equity release is that the interest that rolls up, while the outstanding mortgage grows year on year. Now that is true of a traditional Equity Release Mortgage and these types of Mortgages are still available and popular.
There is still a market for traditional Equity Release and good Lifetime Mortgage Adviser will advise you on the most suitable option based on your circumstances and requirements.
There are now lenders that will offer Retirement Interest Only Mortgages, these lenders will assess the applicants income and outgoings and base lending on affordability. Unlike the Voluntary Interest Only Mortgage discussed above, you will need to show you can afford to make interest only payments for the Lifetime of the Mortgage.
Retirement Interest Only Mortgages can be used for a Re-Mortgage or to purchase property.
Advantages Equity Release with Voluntary Interest Only Payments.
The biggest advantage of this Mortgage option, is the ability to make voluntary Interest Only Payments. This coupled with no requirement to prove affordability means it could offer those concerned about their home value an option to consider.
In the past proving affordability in retirement meant many borrowers were excluded from the market. While this was not really an issue with traditional Equity Release, the roll up of interest was.
While the above advantages are welcome, this type of Equity Release Mortgage is still based on age. So you will be able to borrow more the older you are. So in some cases for younger borrowers e.g. those aged 55 to their early 60’s there maybe restrictions on the amount you can borrow, based on age and house value.
Advantages of a Retirement Interest Only Mortgage.
The biggest advantage of this type of Mortgage over the voluntary payment route, is the lending is based on a percentage of your home value, which is not restricted by your age( as long as you are 55 or over)
While traditional Equity Release Mortgages( including those with voluntary payments) are based on age, this Mortgage type will usually lend more to younger borrowers( over 55) The amounts available will vary from lender to lender, but lending will be based on affordability and loan to value offered by each lender.
Conclusion.
With more innovation in the market place, there are now greater options for people looking to use their home to release Equity from it.
Equity Release and Lifetime Mortgages in whichever guise they take, can be solutions to all sorts of borrowers.
They can be used to clear existing Interest Only Mortgages coming to an end with your current Mortgage Lender to releasing funds to do whatever you wish, from helping your children, going on holiday, buying a new car to buying another property, it is up to you.
Due the relatively complex nature of these types of Mortgages it is vital that you seek professional advice from an experienced adviser. If you would like to discuss any of Lifetime Mortgages discussed in this post, please do not hesitate to get in touch. Our experienced Mortgage Advisers will be happy to help and answer any questions you may have.
Michael Markey
CeMap, CeRER
Mortgage and Equity Release Adviser
This is a lifetime mortgage. To understand the features and risks, ask for a personalised illustration