Voluntary Repayments, Money Jar

The flexibility of voluntary repayments

Growing numbers of people with maturing interest-only mortgages are using flexible new lifetime mortgage products to pay off their loan.

Equity release sales hit record highs in the first quarter of 2016 as homeowners unlocked £393million from their homes in just 3 months. Experts in the industry believe this increase was largely driven by homeowners needing the maximum cash available now to pay off shortfalls in interest-only mortgages.

In 2013 the Financial Conduct Authority published a report showing that up to 2.6million interest-only mortgages were due to come to an end by 2041 – of which almost half of homeowners may be unable to repay the loan at the end of the term. They put the average shortfall at more than £71,000.

In September 2015 Citizens Advice warned that “time is running out” for almost a million people with no strategy in place for repaying their interest-only mortgage – and could face repossession as a result.

Traditionally the over-55s have looked to equity release as a way to boost their income and enjoy more financial freedom in later life. This flexible financial product appears to have evolved into a lifeline for thousands of older homeowners seeking to keep the house they love without fear of their mortgage provider knocking.

Of course, flexibility and variety have played a huge part in the soaring sales of lifetime mortgages. New providers have been arriving to the market in recent months and years, bringing with them new ideas and record breaking interest rates – in turn spurring existing providers to bring better deals to the table too.

Many of these flexible products include innovative features, which allow the homeowner to access the tax-free cash from their home, whilst being able to make voluntary payments on the loan. These can be on an irregular basis or, with some plans, paid regularly by standing order.

The difference between this and a traditional lifetime mortgage is that, rather than interest rolling up over the life of the plan on the original loan amount, payments back to the lender (usually limited to annual payments of up to 10 per cent of the original amount borrowed) can be made to reduce or prevent the interest from accruing.

At a time when many traditional mortgages are being declined following the mortgage reforms of recent years, including stringent affordability checks, the optional partial repayment scheme can be a great solution to those nearing the end of their interest-only mortgage term without any way of repaying the outstanding balance.

There are a number of new options within lifetime mortgage repayment plans for you to choose from and take advantage of, which include:

  • Interest-only – will keep the balance level, allowing you to protect the equity value within the property and any inheritance you wish to pass on to your loved ones.
  • Make ad hoc repayments – whenever surplus savings arise, opting to put a cash payment towards the balance of your plan will slow down the compounding effect of the interest.
  • Utilise the full 10% voluntary payment allowance each year – although this is not a repayment mortgage, by making payments in excess of the interest charged each year will mean that the outstanding balance will reduce over time. Typically there is the potential to repay the entire balance over a 16 to 17 year period, depending on interest rates.

With optional partial repayment plans there are no mandatory repayments – they can be made as and when you wish. Due to their flexibility and the certainty of a fixed interest rate for life (or the option of a new variable rate product currently offering the lowest ever headline rate), they are understandably becoming the lifestyle mortgage of choice for today’s over-55’s.

Remember, equity release will reduce the value of your estate and the amount of the inheritance you leave. Speaking to an independent specialist in retirement lending like Bower is vital before making a decision.