Voluntary payments can be a game-changer for those who are considering equity release. It can provide customers with the flexibility to reduce the cost of borrowing and maintain control over their financial future. By making extra payments to cover the cost of interest, borrowers can keep their equity release balance from increasing, helping to preserve the value of their estate for their beneficiaries. In this article, we explore the benefits of voluntary payments and how they can help you achieve your financial goals while keeping costs under control.
How Do Interest Rates Work on a Lifetime Mortgage?
Interest rates on a Lifetime Mortgage are fixed for the life of the loan and are typically higher than standard mortgages due to the extended term and potential risks involved. The interest is added to the outstanding balance each month, compounding over time, and increasing the overall cost of the loan. However, borrowers have the option to make monthly interest payments or let the interest roll up into the loan balance, which may result in a larger debt to repay in the future.
Mr and Mrs Brown Made Voluntary Repayments; Real-Life Case Study
Mr and Mrs Brown wanted to release equity from their 2-bed bungalow to add a conservatory to create extra space for their grandchildren and make a gift to their son and his family. Their family was growing, and with two grandchildren it wasn’t just their son that needed the extra space, they did too.
Discussing their plans with one of our expert advisers they explained that they have lived in their 2-bed bungalow worth £325,000 for 32 years, and they were very happy, as well as having no desire to move. Our adviser explained that as they were 70 and 68, they were eligible to consider all options for later-life funding. They have one son, and now they have 2 grandchildren, they said that family gatherings take place in their living room; however, as the family has extended over the last 3 years, they would like to make more space by adding a conservatory for their grandchildren to play in and to keep all their toys! Furthermore, they would like to make a gift to their son and his family to allow them to make some improvements to their own home.
Our adviser explained that the current fixed rate of interest for a Retirement Interest Only Mortgage and a Lifetime Mortgage was similar. The lowest fixed rate was 5.65% and they could make payments between 0% and up to 10% of the initial capital on a Lifetime Mortgage. Furthermore, the option to make payments was a standard requirement of the Equity Release Council for all plans
As a family, they agreed that the most important consideration for them was to ensure the capital they borrowed did not increase with compounding interest. They had a monthly budget of £200 which they agreed will be affordable in the short, and long term.
They ruled out a Home Reversion Plan and decided between a Retirement Interest Only Mortgage and a flexible Lifetime Mortgage. They opted for the latter, which allowed them to borrow the required capital and make voluntary monthly payments to cover the interest added to the loan. They had the flexibility to stop, reduce or take a payment break without the risk of their home being repossessed for missing payments.
With the flexible Lifetime mortgage, they decided to borrow £44,750 and by making a monthly payment of £191 for the entire term, ensuring that their capital balance would not increase. They could also make extra payments to reduce the balance further.
Furthermore, they can stop, start, increase (subject to a maximum) and take a payment break without the risk of being repossessed. The adviser also mentioned that by retaining a capital balance there could be an option to re-mortgage in the future if they wanted to secure a lower fixed rate of interest, but their main priority was borrowing enough for their objectives and making affordable payments.
We checked back in with the Browns as part of this article. They were pleased with their decision as they managed to add the conservatory, make a gift of £10,000 to their family and even went on a lovely holiday during the installation process. They recommend starting with smartER™, which is the only live equity release comparison tool on the market. By finding out how much they could borrow and the interest rate, they could then input the information into the voluntary repayments calculator which will give a full breakdown. Equity Release Supermarket can guarantee that this will give you the most accurate result across the whole market before speaking to one of our expert advisers.
Voluntary Repayments – An Illustration
Using the Equity Release Supermarket voluntary repayments calculator we can check on the exact savings using voluntary repayments.
The results below are based on the following situation:
- Property Value £250,000
- £40,000 required for home improvements
- Interest rate of 5.00% (AER)
- Age 65
- Voluntary repayments of £200 a month
| Period | Balance with Repayments | Balance without Repayments | Savings |
|---|---|---|---|
| Year 1 | £42,000 | £42,000 | £0 |
| Year 2 | £41,580 | £44,100 | £2,520 |
| Year 3 | £41,139 | £46,305 | £5,166 |
| Year 4 | £40,676 | £48,620 | £7,944 |
| Year 5 | £40,190 | £51,051 | £10,861 |
| Year 6 | £39,679 | £53,604 | £13,925 |
| Year 7 | £39,143 | £56,284 | £17,141 |
| Year 8 | £38,580 | £59,098 | £20,518 |
| Year 9 | £37,989 | £62,053 | £24,064 |
| Year 10 | £37,369 | £65,156 | £27,787 |
| Year 15 | £33,769 | £83,157 | £49,388 |
| Year 20 | £29,174 | £106,132 | £76,958 |
The impact of voluntary repayments on the overall loan balance is clear to see. Over a period of ten years the amount saved on a £40,000 loan is £27,787 just by making a voluntary repayment of £200 a month. One of the best things about voluntary repayments is they are exactly that – voluntary, there is no penalty for missing a payment and your home isn’t ever at risk.
What Else Should I Consider?
Equity release could be a viable option for those looking to raise funds when in or approaching retirement. However, it is crucial to understand how interest rates work on a lifetime mortgage and the potential risks involved. By making voluntary payments, borrowers can maintain control over their financial future and reduce the overall cost of borrowing. As seen in the case of Mr and Mrs Brown, seeking expert advice and using tools like smartER™ and the voluntary repayments calculator can help borrowers make informed decisions and achieve their financial goals while preserving the value of their estate for their beneficiaries.
Equity Release Supermarket is the only place that can be done so try the tools today, it doesn’t cost you anything.
If unsure, or if you have further questions, you can find your fully qualified Equity Release Supermarket adviser by visiting our find an adviser page here.
