Interest payment options for lifetime mortgages

Lifetime mortgages have grown in popularity for many people seeking financial flexibility and security in later life and retirement.

You can use a lifetime mortgage to access some of the equity built up in your property without the need to sell or move home. The equity can be taken as tax-free cash, either as a lump sum or as a series of payments over time (drawdown).

To be eligible for a lifetime mortgage you’ll need to be aged 55 and over, with a property worth at least £70,000. A lifetime mortgage is a type of loan secured against your home so your home may be repossessed if you do not keep up payments. Over time, interest is charged to both the loan and the interest that has already been added, meaning that the amount of interest owed will increase every year. This is known as compound interest.

Unlike a traditional mortgage, you don't need to make any repayments towards the loan during your lifetime. Instead, the loan is paid back after you or the last borrower (if borrowing jointly) dies, or moves permanently into long-term care. The loan is usually paid back from the sale of the property but can be repaid by other means if there are resources to do so. Equity release will reduce the value of your estate.

Benefits of repaying interest 

With some products, you can pay some or all of the monthly interest and this can have a number of benefits:

Reduces the build-up of interest

With lifetime mortgages, the interest is compounded and added to the loan amount which grows over time. By paying some or all of the monthly interest you’ll reduce the overall loan balance.

Protecting an inheritance

By paying some or all of the monthly interest you could help to protect the amount of inheritance that you leave to loved ones. This is because the amount that will need to be repaid will be less if some or all of the monthly interest has already been paid.

Affordability

Some people choose to use equity release to pay off an existing mortgage on their home, perhaps when they retire or if they’ve seen a drop in their disposable income. When paying a traditional mortgage you’re required to make monthly repayments, but with a lifetime mortgage you can choose whether or not you make monthly repayments. If you choose to make monthly repayments you can choose how much you repay based on what you can afford. You should be aware that repaying an existing mortgage with equity release could cost more in the long-term.

How it works with the Saga Lifetime Mortgage:

The Saga Lifetime Mortgage is provided by Just and is exclusively available through Saga Equity Release. As a member of the Equity Release Council, Just ensure the Saga Lifetime Mortgage meets the Equity Release Council's standards by providing customers with the right to make penalty-free payments to their Saga Lifetime Mortgage. As well as penalty-free payments, the Saga Lifetime Mortgage also allows customers to make regular monthly interest payments.

When you apply for the Saga Lifetime Mortgage you can choose to pay some or all of the monthly interest amount by direct debit.

An example of paying interest

The table below shows the impact of monthly interest payments for the duration of a lifetime mortgage. The more interest that is paid each month, the lower the eventual loan amount that needs to be repaid.

This example shows how interest builds up over 20 years, based on a loan amount of £50,000 at an interest rate of 6.50% monthly equivalent rate (MER).

This example is for illustration purposes only. To keep things simple we have not included house price inflation. The example uses an interest rate of 6.50% monthly / 6.70% annual equivalent rate (AER) (fixed). But the actual interest rate is dependent on factors such as age and the size of loan in comparison to property value, and the rate charged would be the prevailing rate at the time of each advance. The rates quoted assume no cash facility. Projections in the examples do not include any fees. The loan projections may differ if fees are added to the loan. Debt totals include the initial advance amount and compounded interest.

Many people choose to let the interest on a lifetime mortgage 'roll up' (or compound), meaning it gets added to the borrowed amount, and both are paid off together when the property is sold.

In the example above, you can see that after 20 years, if you choose not to make any monthly repayments, the total loan amount would be £182,822. If however you chose to repay 25% of the interest amount (or £68 a month) the total loan amount after 20 years would be £149,293. So by paying £68 per month towards the interest, you’d reduce what you’d owe on the loan by £33,529. Repaying 75% (or £203) of the monthly interest amount would reduce the amount owed on the loan by £100,094 after 20 years. Repaying 100% of the monthly interest would mean that you’d only ever owe the original amount borrowed.

With a Saga Lifetime Mortgage the minimum monthly amount you can pay is £25, up to 100% of the monthly interest amount. For customers who decide to pay 25.01% or more, the interest rate charged is reduced by 0.4%. To keep things simple, this rate reduction hasn't been included in our calculations. Terms and conditions apply. To find out more book an appointment with a Saga Equity Release adviser.

The impact of paying interest on a lifetime mortgage

As shown in the example above, choosing to make payments towards the interest charged on a lifetime mortgage can have a big impact on how much equity remains in your property. Not all lifetime mortgages provide the ability to make regular interest payments, and not everybody chooses to make interest payments, and most importantly there is no requirement to do so. Making payments towards the cost of interest is a personal choice and one you’ll need to consider in line with your financial circumstances. When speaking to a qualified equity release financial adviser, they will let you know the options on interest payments.

To learn more about interest payments and the options available, book an appointment with a Saga Equity Release adviser.