An Interest Only Lifetime Mortgage functions pretty similarly to a standard lifetime mortgage but instead of the interest rolling-up and compounding, the homeowner is able to make monthly interest only payments. This product is particularly popular for those homeowners who are concerned with protecting assets for inheritance to loved ones.
The eligibility for an Interest Only Lifetime Mortgage is based on the same eligibility criteria imposed for a standard lifetime mortgage. You must be at least 55 years old and must on your own property. The amount of equity available to you will be based on the age of the youngest homeowner and the value of the property. The amount of equity that can be released is more for homeowners who are older since their life expectancy is less. You will be required to prove affordability for this product so you will need to provide proof of your income. However, in general, you can expect to be able to determine on your own how much interest you want to repay to the lender and you can base this on the reliability and amount of your income. That said, if you choose to repay less interest than is actually accruing, some part of your interest will have to be rolled up. In any event, so long as you are making interest payments, the roll-up of the interest will be much less than it would be with a standard lifetime mortgage. Many homeowners do choose to pay the full interest amount accrued so that their balance always stays consistent and is only ever equivalent to the amount actually borrowed.
Advantages to Interest Only Lifetime Mortgages
There are a number of advantages to Interest Only Lifetime Mortgages. To start, the interest rate is fixed. You are also able to have control over your loan balance in that you can determine how much interest you want to pay. If you pay the full interest accrued, your balance will only ever be what you originally borrowed and you will still retain 100% of the property. These mortgages can be ported to a new property as well.
Disadvantages to Interest Only Lifetime Mortgages
There are a couple of disadvantages to these products as well. If you pay off an interest only mortgage early, you are likely to receive substantial penalties that you’ll have to pay. In general, taking any equity out of your home reduces the amount of inheritance you are able to leave behind, but this is the case with all equity release products. And particular to these products, if you are unable to maintain your interest payments, you will see your balance grow over time.