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Payment Term Lifetime Mortgages: Pros and Cons Explored
Payment Term Lifetime Mortgages (PTLM) offer a comfortable middle ground between the heavier interest of a lifetime mortgage and the risks associated with an interest-only mortgage, offering the security benefits of the first combined with the interest management of the second.
Equity release provides homeowners with a powerful way to improve their financial stability and usable capital by unlocking the money tied up in their home. For retirees aged 55 and over, equity release products, such as lifetime mortgages, offer strong financial backing - but they do need to be carefully balanced to make sure interest is minimised and repayment manageable.
Find out more with our equity release experts here at Clifton Private Finance.
Key Takeaways
- One of several equity release products, payment term life mortgages offer a way to maximise your estate for inheritance.
- A set monthly repayment ensures interest doesn’t build up in the background.
- With no risk of repossession, and a no negative equity guarantee, payment term life mortgages are regulated and carefully considered to protect you.
- Clifton Private Finance can advise you on payment term life mortgages and other equity release, to ensure you are best served for your capital needs.
Equity Release and Lifetime Mortgages: A Brief Overview
Designed to unlock the financial potential tied up in your home, equity release products are a specialist loan type that don’t require full repayment until you no longer live in the property.
Developed to allow you to live risk-free in your home for as long as you need it, equity release solutions are safe, regulated loans where the lender provides you with significant capital today in exchange for repayment years down the line.
The most common type of equity release is the lifetime mortgage, a loan that’s provided to you with no regular repayments or threat of repossession - just the simple arrangement that it is paid in full, along with all interest, when you are no longer living in the house.
In most cases, this means:
- You have passed away
- You move into long-term care
- You sell the house
Equity release allows you access to the money that is tied up in your home without needing to sell your house. It can be used for many purposes, including:
- Home improvements and renovations
- Paying off other debt
- Helping family members
- Adding to your retirement fund for a more secure day-to-day life
- Having a ‘once in a lifetime’ holiday, or otherwise making the most of your retirement
Recent Equity Release Case Studies
Interest: The Greatest Concern for Equity Release
For most homeowners, the largest worry and biggest question when considering equity release is about the interest and the impact the loan will have when the house is eventually sold to pay for it. Will you leave behind anything for your family? Will there be additional debt to pay? Is a lifetime mortgage a scam? - These are all questions we hear at Clifton Private Finance. Thankfully, the answers are all very positive.
Yes, interest is a major factor when thinking about equity release. With a standard lifetime mortgage, there are no payments made during the term of the mortgage, which means the interest simply builds up in the background and must be paid when the time comes. This can be significant, especially if decades have passed between the time the mortgage was taken out and the day when it must be paid. But there are some significant answers to the concern:
- The No Negative Equity Guarantee - The first reassurance comes with the no negative equity guarantee. This states that no matter how high the balance of the debt is, it will never exceed the value of the house. In short - the lender will never ask for most than the amount the house is sold for. This protects your heirs and family from the idea that they might find themselves owing money - it won’t happen. All regulated lifetime mortgage lenders are signed up to the no negative equity guarantee, and at Clifton Private Finance we only work with these lenders, ensuring your family is kept completely safe.
- The rise of property values - One other major factor is the rate at which your home will rise in value as the years pass. In a great many cases, the interest that is building on the lifetime mortgage is smaller than the growth in your house market value, keeping the relative cost of the equity release down.
- Ringfencing - For those who want to make sure a portion of their estate is untouched by the lifetime mortgage, a percentage of the home value can be locked away and ‘ringfenced’. This means that it cannot be considered when repaying the mortgage and sits outside of the equity release agreement. While this does impact the total that can be borrowed, it remains a good way to keep some aside for your family’s inheritance.
One question that remains is: can’t I just repay the interest?
The answer is yes, you can! That is, if you consider a payment life term mortgage.
Payment Term Lifetime Mortgages: Paying the Interest
The very best way to keep the interest low is simply to pay it. By clearing the interest before it builds up, you neatly avoid the problem of compounded interest - where the interest added to the balance each month generates additional interest, building up and up.
PTLMs are not for everyone - they require that you have a monthly income during the term to make the regular repayments and are, therefore, more often used by younger retirees who are enjoying a reasonable income. They do, however, represent a flexibility that is perfect for many looking at equity release and can save a great deal on the final repayment. When looked at alongside the general rise in property values, a PTLM can be extremely effective.
An Example of a Payment Term Lifetime Mortgage
Harold is 60, and has built up a significant amount of credit card debt, has stretched his overdraft to the limit and still has a little to repay on his mortgage. Though Harold is still earning money, he is paying a great deal in interest and struggling each month. He is looking to lift the burden of his finances and turns to equity release as a solution.
Harold looks at a PTLM for £100,000 at 8%. This would give him enough to pay off his mortgage, his overdraft, and all his credit cards, plus leave him with £13,000 to make some home improvements and have a much-desired holiday.
The PTLM term would last for fifteen years, until Harold is 75, after which time it would become a lifetime mortgage.
Harold considers what the situation would be if he lives until he is 90 and what he’d leave behind for his two children. He estimates that the house would double in value in that time, so should be worth £800,000.
By his calculations, the total that his estate would have to pay on his death would be approximately £320,000, leaving a considerable inheritance of almost half a million pounds for his children.
If he were to just take a standard lifetime mortgage that lasted the full 30 years between today and his being 90, Harold believes the loan might eventually exceed the home’s value, triggering the no negative equity guarantee and leaving nothing behind for his children.
Harold is extremely happy with the PTLM arrangement. It will make a huge positive impact on his daily life, lowering his monthly outgoings by over £1,000 (the credit card payments and his existing mortgage), renovating his home, and getting him a cruise holiday he’d always dreamed of.
5 Advantages of Payment Term Lifetime Mortgages
Every equity release product comes with its advantages and disadvantages. Payment term lifetime mortgages are particularly enticing if you want to capitalise on the equity built up in your home, while protecting the value of the estate your beneficiaries will inherit.
Here are the five key advantages of PTLMs.
1. Limiting Interest
As described, the key benefit of a PTLM over a traditional lifetime mortgage is how it lowers the amount of interest that’s being added to the loan. This is especially important with lifetime mortgage products, as the interest can grow considerably if left unchecked for decades.
Equity release is available to homeowners once they reach 55, a lot earlier in life than may be expected. Taking out a lifetime mortgage at this relatively young age, however, can mean compounded interest reaches significant levels, ballooning the final debt if the term should stretch to multiple decades (which is entirely possible).
The older you are, the less impact the compounded interest on a standard lifetime mortgages makes, so lifetime mortgages for the over 70s are far more cost-efficient than for those still in their sixties. Payment term lifetime mortgages greatly limit the impact of compound interest.
2. Greater Inheritance
By keeping the interest level low, PTLMs mean more of your home’s value is passed onto your family or estate than with a similar-sized lifetime mortgage.
This is possible because you are paying the interest on the loan each month, prevent it from compounding. Other equity release products allow you to leverage the value of your home without any monthly payments - but the interest compounds over the lifetime of the loan, placing greater pressure on your estate when the loan needs to be repaid.
3. Flexibility
PTLMs are quite flexible. Though a term is set for the number of years you must make the interest payments, if your circumstances change and you need to convert your PTLM to a lifetime mortgage earlier than expected, you will be able to do this with either zero or minimal fees.
PTLMs are built to service your needs and can be custom designed to suit your expected income and retirement stage.
4. No Risk of Repossession
Like lifetime mortgages, a payment term lifetime mortgage comes with the security that you are not at risk of losing your home. Should you be unable to make payments, the PTLM is simply converted early to a lifetime mortgage.
This makes it a far safer option than residential mortgages, or retirement interest-only (RIO) mortgages.
5. No Affordability Testing
Unlike a residential mortgage, RIO mortgage, or homeowner loan, PTLMs do not require affordability checks, making them easier to obtain even if your income or credit status is poor.
3 Disadvantages of Payment Term Lifetime Mortgages
Payment Term Lifetime Mortgages come with their own drawbacks too. A PTLM could still be the right product for you, it just means that you should take these factors into account when making a decision.
Here are the three main disadvantages of PTLMs you need to be aware of.
1. Loan Balance Remains
Even though you make monthly payments, it’s important to remember that you are only ever paying off the interest. The balance of the loan is never reduced and must be repaid, typically by a property sale once you (and your partner) no longer live there.
2. The Monthly Payments
Having to make monthly interest payments, however, is a major difference between a PTLM and a standard lifetime mortgage. While they are kept as low as possible, if large capital sums are required, the monthly payments may be significant.
It is important to consider the impact of making those payments throughout the repayment stage of the PTLM and to consider your affordability sensibly.
3. Complex and Specialist Structure
Because PTLMs are less common than other forms of equity release, they are offered by fewer lenders and the application process can seem more complicated.
Thankfully, this disadvantage is easily covered by working with Clifton Private Finance as your independent mortgage broker.
Speak to one of independent experts to discover how we can help you get a customised payment term lifetime mortgage.
Alternatives to Payment Term Lifetime Mortgage
There are a wide range of equity release products and loans that leverage your home as security. While a PTLM may be the perfect solution for many, other options include:
Lifetime Mortgage
A traditional lifetime mortgage requires no monthly payment and is perfectly suited for borrowers who no longer have an income, providing the funds needed for home improvement, debt consolidation, family support, and more.
Drawdown Lifetime Mortgage
With a more flexible structure that allows for multiple smaller capital injections, a drawdown mortgage is similar to a lifetime mortgage but mitigates the interest somewhat by only drawing on the capital as it is needed. If the full sum is not needed at the time of application, a drawdown mortgage can provide an alternative solution to compound interest.
Home Equity Line of Credit (HELOC)
While rare in the UK, a home equity line of credit offers a credit-card like structure that’s secured by your home equity. It is a lifetime mortgage variant designed as an ultra-flexible drawdown mortgage, charging interest only on the exact sums used.
Specialist broker involvement is essential to obtain a HELOC in the UK, with only a few lenders offering this tailored product.
Retirement Interest-Only (RIO) Mortgage
While on the surface, a retirement interest-only mortgage is similar in many ways to a PTLM, it is structured as an interest-only product that is designed to run for the remained of the borrower’s lifetime rather than a defined term, with the capital repaid through the house sale on death.
While a RIO mortgage can often be converted to a lifetime mortgage should circumstances change, unlike a PTLM, this is not guaranteed and the risk of repossession exists.
Remortgage / Second Charge Loan
A mid-term remortgage (15 years or less) or second charge loan (also known as a homeowner loan) may allow you to borrow money using your house as security. For many homeowners who still receive an income, these represent alternative options to a PTLM that also includes repayment of the loan principal.
While this results in a higher monthly repayment, it also limits the size of the capital secured against the property.
A remortgage or homeowner loan that is refinanced with a lifetime mortgage should circumstances change (such that repayments are no longer possible) may be considered as a viable alternative structure to a PTLM that, while more complex, offers potential interest savings.
PTLM vs. Alternatives: Comparison Table
|
Consideration |
PTLM |
Lifetime Mortgage |
RIO |
Remortgage/Homeowner Loan |
|
Monthly repayments |
Yes - for a set term |
No |
Yes - for life |
Yes - for the full term |
|
Requires income |
Helpful |
No |
Yes |
Yes |
|
Affordability tests |
No |
No |
Yes |
Yes |
|
Risk of repossession |
No |
No |
Potentially |
Yes |
|
Switch to lifetime mortgage |
Automatic |
N/A |
Potentially |
Requires refinancing |
|
End impact on estate |
Medium |
High |
Medium |
No |
|
Best for |
Younger retirees with current income |
Older retirees, those without income |
Retirees with secure long-term income |
Retirees with secure long-term income |
Payment Term Lifetime Mortgages with Clifton Private Finance
At Clifton Private Finance, our equity release team are here to help you navigate the complicated lifetime mortgage landscape to get the capital you’re after, with the flexibility you need and the lowest interest rates possible. We will work with you to build a comprehensive understanding of your home equity and future plans to structure a customised solution that properly fits your requirements - whether that’s with a PTLM, a RIO, or a standard lifetime mortgage.
Speak to one of our advisors today. We will answer any questions and concerns you may have before connecting you with the best lenders for your needs. Arrange a free consultation without delay and unlock the savings you have in your home.
