The flexibility of modern lifetime mortgages means that all new plans now offer penalty-free voluntary repayments, in line with the Equity Release Council’s product standards.
In this article, we’ll look at the effects of making repayments on a lifetime mortgage balance, the various ways you can make repayments, and touch on the latest generation of interest-serviced lifetime mortgages.
How popular is making voluntary repayments on a lifetime mortgage?
While lifetime mortgages are often framed as an interest roll-up product because there are no mandatory payments, people use voluntary repayment facilities to help manage the total owed on their plan.
The latest data from the Equity Release Council shows that over 360,000 voluntary repayments were made between 2022 and 2023. Additionally, the average repayment amount increased from £538 in 2022 to £697 in 2023 – a 30% rise on a yearly basis.
How does making repayments affect the lifetime mortgage loan balance?
| Saving by Repaying £100 per month | Saving by repaying £200 per month | Saving by repaying £700 per year | Saving by repaying £1,400 per year | |
|---|---|---|---|---|
| Total over 10 years | £16,905 | £33,810 | £10,215.64 | £20,431.27 |
| Total over 20 years | £49,456 | £98,912 | £29,886.28 | £59,772.57 |
Source: Equity Release Council. Note: examples are based on an interest rate of 6.57% MER, the average paid by new drawdown lifetime mortgage customers in the second half of 2023
Based on an interest rate of 6.57% MER (the average rate paid by new drawdown customers in the second half of 2023), the Equity Release Council’s data shows that a monthly repayment of £100 would leave a customer with £17,000 less owed over ten years compared to not making any payments and letting the interest roll up, and around £49,500 over twenty years.
Voluntary repayments mean customers can repay in their own way whether through regular monthly payments like the above example or larger ad-hoc payments as and when they want to, or are able. In this scenario, the Equity Release Council’s data shows that a £700 annual ad-hoc payment would result in £10,200 reduction in the amount owed over ten years compared to not making any voluntary payments, and nearly £30,000 over twenty years.
How much can I typically repay annually without incurring penalties?
The exact amount will depend on the lender and product you choose – but all lenders will allow up to 10% of the initial loan to be repaid yearly before you incur early repayment charges – if you are still in a penalty-free period. Some products offer a little more - our Emerald range allows up to 12% to be repaid annually – while at the extreme end of the market, products like our Heritage Freedom 20 and Heritage Freedom 40 allow up to 20% and 40%, respectively, to be repaid annually. These sorts of products are designed to meet the needs of lifetime mortgage customers who expect to receive a larger cash payment, perhaps from an inheritance, a family member, an investment, or a pension, and wish to use this to reduce the cost of their lifetime mortgage.
How can I make repayments on my lifetime mortgage?
Again, this can depend on the lender; most will allow you to make ad-hoc payments or set up a standing order. Ad-hoc payments usually involve phoning the lender’s office and arranging a partial repayment with their dedicated payments team. Similarly, as part of this process, the lender can provide you with the necessary bank details to set up a standing order with your bank for regular payments.
Some lenders will also allow you to set up Direct Debits to help simplify the regular repayment process, and at the time of writing, it’s something we’re proud to be offering on most of our plans.
If you are used to doing your banking online, then look out for lifetime mortgages that offer an online account management platform. We’re pleased to offer all of our customers access to our MyPure platform, allowing you to self-manage a number of key processes, from viewing your balance to making ad-hoc payments and setting up recurring ones.
Repayment options across lifetime mortgage plans:
- You can choose to pay 100% of the monthly interest charged by the lender. By paying the interest in full will result in the original balance remaining level for the duration of the mortgage term. (This is dependent on the early repayment charge allowance)
- You choose to pay a fixed percentage of the interest charged by the lender each month. By paying less than 100% of the interest charged (e.g. 50%) will still result in some roll-up of interest, albeit this will be lower than otherwise have been if no payments had been made.
- You choose to make ad-hoc payments when you have funds available to pay to the lender. All lifetime mortgages now come with a flexible voluntary payment facility, which means that up to 10% of the original amount borrowed can be repaid to the lender each year with no penalty. Some lifetime mortgages, such as the Pure Retirement Heritage Freedom 40 plan will allow you to pay up to 40% pa of the original loan.
What are interest serviced lifetime mortgages?
If your financial adviser recommends an interest servicing plan, an interest rate discount may apply if you make regular monthly payments. This discount can vary between lenders and also can be dependent upon how long payments are fixed for. After your interest serviced lifetime mortgage has been set up, your monthly payment amount cannot be changed, but you can choose to stop making the monthly payments at any time.
Lenders offering interest serviced lifetime mortgages will allow you to miss a certain number of payments (perhaps over a specific period). Still, it’s important to note that once you have breached those conditions the interest rate will increase as the discount will no longer apply for the remainder of your lifetime mortgage. The plan will revert to a traditional lifetime mortgage, and any unpaid monthly interest will be added to the loan each month and rolled up.
