One of the most common myths around lifetime mortgages is that you cannot pay off the interest on the loan until the property is eventually sold. Understandably, the idea of interest accumulating over a number of years can be a daunting prospect for those who have firm expectations about the inheritance they hope to leave to their loved ones.
However, there are now products within the sector, like our own interest select option or More 2 Life’s interest choice plan, where the customer decides to release cash from their home and then can choose how much interest they want to pay and for how long.
If they opt to make the full interest payment for the life of the loan, they eliminate the impact of interest roll-up and the outstanding balance does not increase.
A growing number of our customers are now looking to options like these as their mainstream interest-only mortgage reaches maturity.
Last year, the FCA discovered there were 2.6 million interest-only mortgages due for repayment by 2041.
As many as 48 per cent of these face a shortfall at repayment day of an average around £71,000 and up to 260,000 have no repayment vehicle of any kind in place. For many, downsizing or selling-up are not viable options and it is here that lifetime mortgages will have a bigger role to play.
Four in 10 Stonehaven customers are now using a lifetime mortgage to clear their existing mortgage, an increase of over 10 per cent since 2008. The home is often a retiree’s biggest asset so we suggest it is considered alongside the other assets in retirement planning.
Figures from the thinktank Demos have revealed that the UK’s over 60s are sitting on homes worth a total value of £1.28trn – a massive sum which illustrates the potential of utilising property effectively.
Releasing equity from the home can support the income of older homeowners and help those struggling for options when dealing with their interest-only mortgage shortfalls.
A lifetime mortgage can mean very little change from the customer’s current mortgage situation. With the interest-only option, they continue to make monthly payments as they always have done.
Safeguards within the product features mean there is no threat of repossession. In addition, a percentage of the sale value of the home can be protected so it is available to leave as an inheritance to loved ones.
So with this in mind, an interest paying lifetime mortgage could prove a sensible solution to many of those affected by the interest-only “timebomb”. As an industry, we should strive to ensure people in, or approaching, retirement are aware of all of the options available to them when thinking about funding their retirement.