Unless you choose to do so, there are no repayments to make on a lifetime mortgage until the plan comes to an end. As a result, you pay interest not only on the loan itself, but also on the interest that’s already been added to the loan - this is known as compound interest. 

This means that at the end of the first month with your lifetime mortgage (or year, depending on your plan), the interest is charged on the original amount you borrow.

However, in the month or year following, and every period thereafter, the interest is added to the full balance of the loan, including any previous interest accrued. This cycle continues until the plan comes to an end. This means a larger amount of interest is added to your lifetime mortgage each period. The interest rate at the beginning of your plan determines how quickly the interest grows which will impact the total cost of borrowing over the term of the loan.

Equity release will reduce your estate’s value and may affect your entitlement to means-tested benefits.
 
A lifetime mortgage may result in limited or no property equity remaining and will reduce your financial options in the future.

How can I reduce the cost of my lifetime mortgage?

You do, of course, have options to help reduce the total cost of the loan over the lifetime of your plan if that’s important to you; for instance, if you wish to leave a larger estate to your loved ones. These include:


Make repayments

Even though there are typically no monthly repayments to make with a lifetime mortgage -as the loan, plus compound interest, is typically repaid through the sale of the property when the last remaining applicant passes away or moves into long-term care - all our plans come with the option to make ad-hoc or regular repayments to help reduce your total cost of borrowing, without incurring an early repayment charge, subject to criteria.

Even if you’re only able to make small repayments, it’ll help reduce the amount of interest you accrue over the lifetime of your loan.

Illustrative example

In the below example, if you were to borrow £81,703 at a fixed interest rate of 6.74% MER (Monthly Equivalent Rate) and make no repayments at all, after 15 years, your total cost of borrowing would be £223,915. However, by making a monthly £250 repayment, after 15 years, you’d owe £146,440 – with a total cost of borrowing, including repayments,
of £191,440. This means, by repaying £250 a month, you, and your beneficiaries, could benefit from a £32,475 net interest saving.

 


Consider a drawdown plan

With a drawdown lifetime mortgage, you release an initial lump sum for your immediate needs and then withdraw the remainder of your release in smaller withdrawals as and when needed, subject to minimum amounts. This can help reduce your total cost of borrowing, as interest is only charged on the money you release, rather than the full amount available.

Please note that a drawdown facility is not guaranteed and is subject to the prevailing interest rate at the time funds are released. 


Remortgage to another lifetime mortgage plan in the future

If interest rates reduce in the future, you may have the option to remortgage your current plan to secure a lower rate. By paying a lower MER (Monthly Equivelant Rate), you can reduce your total cost of borrowing. However, a reduction to interest rates in the future isn’t guaranteed. 

It’s also important to remember that there may be an early repayment charge (ERC) payable if you choose to remortgage your lifetime mortgage. Your adviser will consider any early repayment charges you need to pay.

At more2life, with some of our lifetime mortgages, you’re able to repay your loan in full without an early repayment charge. If this is important to you, your adviser will be able to help you understand which product is best suited to your needs.

Alongside the benefits of equity release, we also want you to be aware of what’s important to consider before making a decision.

1. A lifetime mortgage is a loan secured against your home and subject to compound interest, meaning the amount you owe can grow quickly
2. Equity release will reduce the value of your estate and may affect your entitlement to means-tested benefits
3. Equity release may leave you with limited or no property equity remaining
4. Equity release will reduce your financial options in the future
5. A lifetime mortgage is a long-term financial product and is not designed to be fully repaid until the death or entry into long-term care of the last remaining borrower, otherwise early repayment charges may apply

We use essential cookies to make our website work properly when you visit us. We’d also like your consent to set other non-essential cookies to help us improve our website and tailor the marketing you see.