"It’s important customers not only understand the costs associated with a lifetime mortgage but how to manage those costs."
75% of lifetime mortgage customers choose to let their interest roll-up during the loan period, despite lifetime mortgage products now offering the flexibility of being able to pay off some or all the interest every month, new research from Responsible Life shows.
However, the figures show that repaying a small percentage of the interest on the loan every month can have a huge impact on the amount of equity left in the home at the end of the loan term.
The later life mortgage broker says lifetime mortgage customers could leave tens of thousands of pounds in extra inheritance to their families by repaying rolled-up interest of just £100 per month.
The calculations are based on a £400,000 property with no mortgage (and not taking into account boost in property value), a lump sum lifetime mortgage of £82,000, an average interest rate of 6.65% and an average loan term of 16 years.
If a customer lets the monthly interest of £454 roll-up over the term of the loan, they would have £163,066 of equity left in the property once it’s sold after 16 years.
By choosing to make small interest repayments of £100 per month for five years - which is less than a quarter of the monthly rolled-up interest and less than a third of the loan term - the equity left would be £177,781.
Making repayments of £100 per month for the entire loan term, the equity left on sale of the property would be £197,161 or £34,000 more than if no interest was repaid. This equates to approximately a 10% boost in inheritance.
By stretching to repaying 50% of the rolled-up interest over the 16-year period, this would boost the equity in the property by 25% - almost £100,000.
Steve Wilkie, executive chairman of Responsible Life, said: “One of the historic concerns amongst consumers/homeowners when it comes to taking out an equity release plan is the amount of rolled-up interest paid when the home is sold.
“Lifetime mortgage products now offer customers the flexibility to pay off some or all of the rolled-up interest every month to leave more equity in the property, and yet three-quarters of equity release customers still choose not to repay any interest.
“It’s important customers not only understand the costs associated with a lifetime mortgage but how to manage those costs.
“Equity release has been criticised as expensive compared to other mortgage types, particularly the retirement interest only-mortgage aimed at a similar age group. The criticism was aimed at the costs of letting the interest roll-up, but is now outdated.
“With the flexible repayment features now available in all Equity Release Council approved plans, customers now have control over the costs in a similar way to other mortgage types.”
