Most people hear "lifetime mortgage" and picture no payments and a balance that quietly grows. That is one way to run one. It is not the only way.
On a modern lifetime mortgage you can choose to pay the interest as you go. Pay all of it and the amount you owe stays where it started. That is the version this page is about: a lifetime mortgage where you choose to pay the interest.
What an interest only lifetime mortgage is
A lifetime mortgage is a loan secured against your home. You need to be 55 or over, it is always taken out on your main residence, and you continue to own your home. The loan is normally repaid when the property is sold, after the last borrower dies or moves into long term care.
Historically, the interest on these plans rolled up for the whole life of the loan. Modern plans give you a choice instead: pay the interest monthly, pay it now and then, or let it roll up.
Choose to pay the interest in full and the balance does not grow. The amount you borrowed is the amount you owe. That is the interest only version.
It is not an income assessed loan. How much you can borrow is based mainly on your age and your property value, and in some cases your health and where you live. On the plans this page describes, the payments are your choice rather than a requirement of the loan. Terms differ between plans and lenders, and Craig goes through the terms of any plan with you before you commit.
Why paying the interest makes such a difference
On a lifetime mortgage where nothing is paid, interest is charged on the loan and then on the interest already added. That is compounding, and over many years it can significantly increase the amount owed. It is why, on a lifetime mortgage, the interest is the main cost over time.
Paying the interest stops that at source. Nothing is added to the balance, so there is nothing to compound. When the plan is eventually repaid, the debt is the amount you originally borrowed, which leaves more of your home's value to pass on. And because lifetime mortgage rates are fixed for life, you know the rate from the start.
Paying all of it, or just some
This is not all or nothing. You have three settings, and you can move between them:
- Pay all the interest. The balance stays level.
- Pay some of it. The balance still grows, but more slowly.
- Pay none of it. The interest rolls up and compounds, as on a standard lifetime mortgage.
Payments can be made monthly or ad hoc, with no penalty, within the lender's terms. It is your choice, and you can change your mind.
Most plans also include a drawdown facility. You take what you need now, leave the rest in an agreed reserve, and only pay interest on what you have actually taken. Put drawdown together with paying some or all of the interest and you keep very close control of what you owe. The reserve is not a guarantee. A drawdown facility is agreed with the lender, but the terms of future drawdowns are the lender's.
What happens if you stop paying
The detail depends on the plan, and it is set out in the lender's terms. On a plan where the payments are voluntary, which is how the choice above works, stopping means the interest is added to the balance again. From that point it compounds, just as it would on a plan where nothing had ever been paid.
Plans differ on the practical side, such as how payments are made and changed. Read that before you choose, not after. Craig goes through it with you as part of the advice.
One thing to be clear about, because the two products are often confused. If you proceed with a mortgage that requires payments to be made, your home may be repossessed if you do not keep up repayments on your mortgage. That applies to a retirement interest only mortgage, where the monthly interest payment is required, and to any mortgage where payments are a condition of the loan.
How it differs from a retirement interest only mortgage
Both can leave you paying interest each month with a balance that stays level. Underneath, they work very differently.
| Interest only lifetime mortgage | Retirement interest only mortgage (RIO) | |
|---|---|---|
| Monthly interest payment | Your choice on the plans described here. You can pay all, some or none | Required. A monthly interest payment is agreed |
| Assessed on | Mainly your age and property value, not your income | Your income, and for joint applications the survivor's income |
| Minimum age | 55 | Typically 50, depending on the lender |
| Credit history | Does not matter in the way it does for a RIO | Can affect whether you qualify |
| If payments stop | On voluntary plans, interest is added to the balance | Your home is at risk of repossession |
| Drawdown for later | Available on most plans | Not available. A further advance needs a new assessment |
A RIO is assessed on affordability. As an indicative guide, lenders typically work to around 4.5 times your retirement income, or on a joint application 4.5 times the lower of the two survivor incomes.
Neither product is better in general. The right one is the one that fits your circumstances, and sometimes that is neither.
Who it tends to suit
An interest only lifetime mortgage tends to suit people who:
- can afford to pay the interest now and want the balance to stay level, often to protect what they leave behind
- would rather not take on a payment that is a condition of the loan
- have an income that would not support an affordability assessed loan for the amount they need, but could still pay some of the interest
- like the flexibility of a drawdown facility for future needs
If you have a reliable, evidenced retirement income and are comfortable with a required monthly payment, a RIO might suit you better. Downsizing, or something else entirely, may be the right answer instead. Our page on alternatives to equity release goes through those honestly, and lifetime mortgage vs RIO compares the two side by side.
Using the calculator
Two of the tools on the calculator help here.
The interest calculator shows how a balance could grow if none of the interest is paid, at a rate you choose. That rate is an example, not a rate we are offering or quoting you. If you paid all the interest instead, the balance would stay at the amount you borrowed, so the gap between the two figures shows the roll-up that paying the interest would avoid. Paying the interest means making those payments as you go instead.
The retirement interest only calculator gives an indicative guide to the maximum RIO your income could support. Both are guides only, and you see the real figures for your case before you commit to anything.
What it costs to get advice
There is no charge for the initial conversation. Our advice fee is a maximum of £1,495, payable only if your case completes. Other lender and solicitor fees may apply, and you must have independent legal advice before a lifetime mortgage goes ahead. Our page on what equity release actually costs sets out each part.
Every lifetime mortgage we advise on includes a no negative equity guarantee, so you will never owe more than your home sells for. Equity release will reduce the value of your estate and could affect your entitlement to means-tested benefits, whether or not you pay the interest.
Interest only lifetime mortgages: common questions
Is there equity release with no monthly repayments?
Yes. On a standard lifetime mortgage no monthly payment is required. The interest is added to the balance instead and compounds, which reduces what you leave behind, and the loan is repaid when the property is eventually sold.
Can I pay the interest on equity release?
On a modern lifetime mortgage, usually yes. You can pay some or all of the interest, monthly or ad hoc, with no penalty, within the lender's terms. Pay it in full and the balance does not grow.
What happens if I stop paying the interest?
On a plan where payments are voluntary, the interest is added to the balance again and compounds from that point. The exact terms depend on the plan and the lender, so it is worth understanding yours before you choose.
Is an interest only lifetime mortgage the same as a retirement interest only mortgage?
No. On the lifetime mortgages described here, the payments are your choice and borrowing is based mainly on your age and property value. On a RIO the monthly interest payment is required, borrowing is based on your income, and your home may be repossessed if you do not keep up the payments.
Is there an interest only lifetime mortgage calculator?
Our interest calculator shows how a lifetime mortgage balance could grow if nothing is paid, at a rate you choose. If you pay all the interest, the balance stays at the amount you borrowed, so comparing the two shows the difference paying makes. The figures are illustrative only and are not advice or a quote.
Not sure how any of this applies to your own circumstances? Craig is happy to talk it through, free and with no obligation.
Talk it through with Craig
If you want to see how this would work with your own figures, that is a conversation rather than a calculator.
Book a call with Craig or call 0113 403 5584.
