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Equity Review | October 18, 2017

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Interest Only Lifetime Mortgage

Retiring should be about fun and enjoyment of life. For many in today’s world it is a period of anxiety and monetary concerns. More individuals are working longer because they need the additional years of income to make it through retirement. Even working longer may not provide enough retirement funds in their pension pots. After spending a life working hard, paying off a mortgage, and now having freedom you should be rewarded. If you find yourself in a restrictive cash situation, but have equity in your home you may benefit from interest only lifetime mortgage.

What is an Interest Only Lifetime Mortgage?
An interest only lifetime mortgage is the only form of lifetime mortgage to offer the option of making monthly repayments. Each month with this type of loan you are expected to make a contribution of at least £25 in an interest payment. The amount that is more frequently repaid however is the full interest amount charged. Therefore, if the full amount of interest is paid then the balance will be maintained at the same level for the duration.

However, two lenders currently offer the option of interest only equity release schemes which allow for a smaller interest payment than the accrued amount to make it affordable. Both Stonehaven & More2life will allow anywhere between £25pm upto the full interest charged to be repaid. Once this amount is selected it needs to be maintained & cannot be altered. The only time this can be changed is when the homeowner opts to actually cease making payments altogether which can be accomplished with these two plans.

Like standard lifetime mortgages you do not repay the principle balance until death. You are also required to repay the loan if you move out of your home into long term care or live in a new place for your main residence. Interest only equity release mortgages are a lump sum option in most instances. You will have a tax free sum of cash released to you. There are exceptions with certain lenders who allow a drawdown facility. This can be attached when you set up the loan or added later in which case the interest will increase. Typically, it is just a onetime release.

How the Calculation Works
To determine the amount of the lump sum payment and interest to pay each month, the lender uses a loan to value (LTV) percentage calculation. The lender examines your age, which must be 55 years at least. They may also have a maximum age they are willing to lend an interest only lifetime mortgage to. An age cap might be 75 or up to 90. It just depends on the lender. Age is a reflection of the years you have remaining in your life. The theory, albeit a little cold sounding, is that a person who is older will not live as long as a younger person. It means the lender gets their full funds returned earlier if someone is nearer to death.

The next part of the calculation is property value. Lenders set a minimum property value usually £70,000. The fixed interest rate is then used to determine how much you can borrow as a maximum lump sum.

Lending companies are held to specific regulations by the Equity Release Council Code of Conduct and Financial Conduct Authority. It is no longer allowed to offer you a product without a no-negative equity guarantee. This ruling states your age, the property value, and interest which determine the maximum lump sum cannot add up to more than the full property value.

In this situation you are given anywhere from 19% to 49% of the home value in a lump sum equity payment. The LTV percentage is lower for someone who is younger based on that life expectancy issue.

Mortgage Market Review (MMR)
When interest only lifetime mortgages were introduced to the equity release market, there were no real regulations regarding affordability. From the lifetime mortgage lenders perspective, the payments made by the homeowner were classed as ‘contributions’ towards the interest charged.

However, in April 2014 the FCA introduced new regulations for the mortgage market, of which these interest only lifetime mortgages from Stonehaven & More2life were incorporated. Therefore, now both lenders must assess affordability as a measure of whether these schemes can be offered to homeowners. Each will check affordability by way of asking for proof of incomes to ensure the monthly payments are affordable.

Building in More Guarantees
The no-negative equity guarantee is just one clause to have in the contract. The second is inheritance protection. It is an elective clause to add to your contract at the initial loan signing. This guarantee removes a portion of the home value for inheritance. It is a portion that cannot be touched by the loan or interest. In the event you have to stop paying interest or not pay the interest in full, this portion of the house still remains outside of the loan calculation, and thus the money a company can keep during the repayment process.

Since you are already paying on the interest you have a minor guarantee of inheritance, but it is always better to protect it with the clause. Also you can rollover your interest only lifetime mortgage into a lump sum if you start to struggle with repayments should you wish to ease your mind about making monthly payments for 30 plus years. This option to cease payments also acts as a bar to prevent potential repossession like conventional mortgages would.