Are you able to pay the interest on your equity-release loan?

Hyacinth and Rexford had recently decided to downsize their home now their kids have all flown the nest, so there was no longer any need for the large family home. Consequently, they moved from the four-bedroom home they had in Whittington to a smaller two-bedroom house close to the city centre in Lichfield. The new house gave them easier access to local amenities and was closer to their family, allowing them to spend more time with their grandkids. Given how much property prices have increased over the last two years, after they’d paid their legal fees and stamp duty, their savings were less than they’d initially expected. Hyacinth got in touch with me to chat about releasing equity to replace the kitchen in their new house and to make some necessary improvements in the garden, so it would be safer for when the grandkids came to visit.

Her biggest concern regarding equity release was the roll-up effect of the interest. As many parents do, she and Rexford wished to leave their kids and grandkids an inheritance, but they were under the impression that they wouldn’t be able to pay back the interest during the lifetime of their loan if they released equity from their home. They were worried that by taking some of the equity out of their property now they’d have to accept that there would be nothing left for their family. I was happy to tell them that this isn’t necessarily the case!

All lifetime mortgage providers offer an option to make partial payments towards the interest throughout the duration of the loan. A couple of providers will allow you to pay a set amount each month via direct debit, whilst the rest allow payments to be made on an ad hoc basis, either over the phone or via bank transfer.

If you’re asking, “Can I pay off the interest on my equity release loan?” the answer is yes, you may pay it monthly or as and when you’d like to. Just make sure your lifetime mortgage allows partial payments or overpayments when deciding which is the best one for you!

As the loan is designed to be repaid when you pass away or move into long-term care, you aren’t obligated to make any payments. However, for those of you who do wish to make payments, the process is very straightforward. In general, lifetime mortgages allow you to make up to 12 payments per year, subject to a minimum payment of £50 each time. The total each year is normally is limited to 10% of the initial loan amount or 10% of the outstanding balance. The present average interest rate for a lifetime mortgage is around 3.50%, so if you were to pay all the interest each year – effectively stopping the debt from rolling up – you’d still be within the annual 10% allowance and not incur any penalty charges.

As Hyacinth and Rexford were in a position where they could afford to make payments towards the interest, they chose to take out a lifetime mortgage that allowed this. They liked the idea of the payments not being mandatory, so they selected a lifetime mortgage that accepted ad hoc payments. Like some of my other clients, they decided to set up a separate savings account into which they would transfer any spare money they had at the end of each month. Then, at the end of each year, they plan to contact the lifetime mortgage lender and make a payment based on how much they’ve saved. By making the payment annually, they’ll be able to build up a savings fund throughout the year and then decide how much to contribute towards the lifetime mortgage – or not as the case may be! This flexibility gave them the confidence to proceed with their lifetime mortgage, and due to the provider fixing for life the interest rate charged (find out more here), it was simple for them to budget how much they’d need to save each year to stop the interest from rolling up and reducing the family’s inheritance.

If you’re considering equity release and you’re concerned about how the interest will affect the inheritance you’ll be able to leave your family, I’m very happy to have a chat and provide advice based on your personal circumstances and wishes.